July 26, 2013 / 8:12 PM / in 4 years

FOREX-Dollar falls as Fed seen keeping U.S. rates low for some time

* Speculation rises Fed may tweak its forward guidance on
    * Dollar index hits lowest since June 20
    * Investors await U.S. payrolls, ISM data next week

    By Gertrude Chavez-Dreyfuss
    NEW YORK, July 26 (Reuters) - The dollar slumped to a
five-week low on Friday, falling for a third straight week, on
expectations the Federal Reserve will affirm at its monetary
policy meeting next week that it intends to keep interest rates
low for an extended period.
    The Fed meets on Tuesday and Wednesday. A Wall Street
Journal report suggested that the U.S. central bank may debate
changing its forward guidance on rates to emphasize the fact
that it will not raise borrowing costs any time soon.
    Analysts said this could keep the dollar on the defensive in
the near term. But losses will likely be limited before a deluge
of economic data next week, which includes nonfarm payrolls for
July and the Institute for Supply Management indexes for the
manufacturing and service sectors.
    "People got excited about Fed tapering in May and June and
that has sort of been priced in and now that yield support for
the dollar has been eroded, positions on long dollars are being
squeezed," said Vassili Serebriakov, currency strategist at BNP
Paribas in New York.
    He added that The Wall Street Journal article has added
uncertainty to the Fed meeting next week, mainly as to whether
it would stick to its initial guidance of a reduction in asset
purchases by September.
    The dollar index fell 0.4 percent to 81.625, having
hit 81.548, its lowest since June 20 and just above chart
support at 81.506, which is its 200-day moving average.
    Data from the Commodity Futures Trading Commission showed 
net dollar longs fell to $28.69 billion in the week ended July
23, from a six-week high of $29.61 billion the previous week.
    "Folks are just treading water. They just want to see the
big numbers next week to get some directional guidance," said
Samarjit Shankar, director of market strategy at BNY Mellon in
    The dollar resumed a slide that had begun on July 10 when
minutes of the Fed's June meeting gave investors second thoughts
about when the bank would start reducing stimulus.
    The euro rose to a five-week peak of $1.3296, helped
by this week's solid euro zone purchasing managers' surveys. It
was last flat on the day at $1.3281. Resistance is seen at the
mid-June high of $1.3415.
    Axel Merk, president and chief investment officer of Merk
Investments in Palo Alto, California, said the euro has the
potential to rise to $1.40 this year and $1.50 next year because
European Central Bank monetary policy is more restrictive than
in the United States.
    The euro is around 10 percent higher against the dollar
since ECB President Mario Draghi vowed a year ago to do whatever
it takes to save the single currency, calming investors' fears
about the euro zone breaking up. 
    The dollar, meanwhile, fell to a four-week low of 97.94 yen,
according to Reuters data, and was last down 1.1 percent at
98.19 yen.
    Despite Friday's losses, analysts said the U.S. currency is
expected to be well supported over the coming weeks on
expectations the Fed may still scale back bond purchases as
early as September.
    A survey on Friday showed U.S. consumer sentiment rose in
July to its highest in six years as Americans felt better about
the current economic climate, though they expected to see a
slower rate of growth in the year ahead. 
    For the week, the euro gained about 1.1 percent against the
dollar, its third straight week of gains. The dollar lost 2.4
percent against the yen, the worst week since mid-June.
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