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FOREX-Dollar drifts higher, but prospects remain dour
September 20, 2013 / 7:15 PM / in 4 years

FOREX-Dollar drifts higher, but prospects remain dour

* Dollar selloff abates, though index still near 7-month low
    * German election outcome this weekend a key euro focus
    * Dollar climbs to one week high vs yen


    By Gertrude Chavez-Dreyfuss
    NEW YORK, Sept 20 (Reuters) - The dollar edged up from this
week's seven-month low on Friday, helped by comments from St.
Louis Federal Reserve President James Bullard who said it was
possible the Fed might start to pare back bond purchases in
October, depending on U.S. data.
    The greenback's outlook, however, remained downbeat, after
the Fed on Wednesday unexpectedly decided to keep its massive
stimulus program intact for now, citing a still high U.S.
unemployment rate and rising mortgage costs.
    That should ensure U.S. interest rates would remain low for
an extended period, diminishing the allure of dollar-based
assets.
    Samarjit Shankar, director of market strategy, at BNY Mellon
in Boston, said the bottom line is that the Fed's decision two
days ago to stand pat on its stimulus "has further fuelled
dollar pessimism and risk-on trades."
    But Bullard, a voter on policy this year who has backed
record stimulus, gave hope to the "taper" enthusiasts, even
though most economists now expect the Fed to reduce its bond
purchases in December. 
    The dollar touched a one-week high against the yen and rose
against the euro after Bullard's remarks. It was last little
changed versus the yen at 99.38 yen, while the euro also
traded flat versus the greenback at $1.3521. 
    The dollar index was last up 0.1 percent at 80.443, a
little above Wednesday's seven-month trough of 80.060.
    Bullard also said this week's decision not to taper was a
close one, and added that low readings on inflation meant that
the Fed can afford to be patient about the timing of a
scale-bank in its bond buying program. 
 
    However, Kansas City Fed President Esther George, the lone
dissenter on the Fed's policy decision, on Friday, criticized
the central bank's decision on Wednesday, warning it sowed
confusion and risked the bank's credibility given how convinced
financial markets were that policy would be adjusted.
    She noted the "costly steps taken to prepare markets" in
recent months for a policy change, and warned that the Fed's
message has been muddled. 
    Still, some analysts believe the dollar's longer-term
uptrend was still intact. 
    "The main takeaway from Wednesday is that Fed tapering is
delayed, not that it has been removed. At some point the Fed
will move to taper and we will see U.S. yields move
a bit higher and support the dollar," said Sara Yates, global
currency strategist at JP Morgan Private Bank in London.

   U.S. BUDGET SHOWDOWN     
   Investors, however, remained cautious not only about the
scope and extent of the Fed's eventual exit from quantitative
easing, but also the decision about Fed Chairman Ben Bernanke's
successor, and the the looming congressional budget battles. And
these factors could further weigh on the dollar.
    The congressional battle is between rival U.S. political
parties over raising the U.S. debt ceiling to allow the
government to keep borrowing money to pay its bills. That
decision is expected to come to a head later this year.
    Even closer is a congressional fight over the Federal budget
to avoid shutting down the government. 
    "As Congress returns to work in Washington DC, the two
parties show no willingness to compromise on the key issues of
budget deficit and debt ceiling limits," said Boris Schlossberg,
managing director of FX strategy at BK Asset Management in New
York. 
    "With (the Republicans) sensing that President Obama has
been weakened by his handling of the Syria crisis, their
intransigence may only harden as the days go by, with the
possibility that the U.S. could face another government
shutdown."
    The euro was down 0.1 percent at $1.3520, having hit
a 7-1/2 month high on Thursday.
    Analysts said the euro could see marginal impact from
Germany's general election on Sunday. 
    Chancellor Angela Merkel is seeking a third term but there
are doubts she will be able to maintain her centre-right
coalition, which could complicate her euro zone policy. 
    The euro was down 0.1 percent against the yen at 134.38 yen
, not far from the near four-year high of 134.94 yen
touched on Thursday.

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