May 1, 2013 / 8:16 AM / 5 years ago

FOREX-Dollar slips as Fed easing expected to stay intact

* Investors expect Fed to recommit to QE

* Fed meeting outcome due 1800 GMT

* U.S. manufacturing, jobs data this week could hurt dollar further

* Euro near 2-week high ahead of ECB meeting

By Anooja Debnath

LONDON, May 1(Reuters) - Expectations the U.S. Federal Reserve will stick to its aggressive stimulus programme kept the dollar struggling near a two-month low against a basket of currencies on Wednesday.

Although U.S home prices and consumer confidence data have been encouraging, an unexpected contraction in business activity on Tuesday combined with a recent run of soft data has sparked worries of an economic slowdown and weighed on the dollar.

It could be dragged lower if, as expected, the Fed says following its monthly meeting that it recognises the need for further stimulus to help a still-patchy economic recovery.

The dollar index was at 81.714, after having fallen to a trough of 81.598 on Tuesday, its lowest since February 28. The break below 81.744, the 38.2 percent retracement of its January-April rally, has opened the way to further losses.

“We think the Fed will be as dovish as it can afford to be, and as such the softness of the dollar is justified and if anything it could extend a bit further,” said Adam Cole, global head of FX strategy at RBC Capital Markets.

“The Fed will at least recognise that (U.S.) data has been soft since the last meeting and ... there will be no talk of tapering asset purchases or exit strategies or withdrawal of monetary stimulus.” The Fed’s decision is due at 1800 GMT.

Just a month ago, most market players believed the Fed’s next move would be to scale back its monetary easing programme.

Strategists said the Institute of Supply Management’s manufacturing index at 1400 GMT and Friday’s employment report will also be key for the dollar.

Trading was subdued in Asia and is likely to be so in Europe, where many markets are observing the May Day holiday.

Against the U.S. currency, the euro was flat at $1.3167, not far from Tuesday’s peak of $1.3187 - its highest level since April 17. The euro now faces tough resistance around $1.3200, a level that capped it last month.

The weak dollar has limited the euro’s losses despite disappointing economic data from the bloc but that may change if the European Central Bank cuts interest rates on Thursday.

The dollar was flat against the yen at 97.43 yen, after having hit a two-week low of 96.99 yen the previous day.

The yen has been under intense pressure from the Bank of Japan’s radical stimulus steps but strong support for the currency at 100 from Japanese exporters and option players means many yen bears are abandoning their bets for now.

“At the moment, the market is considering the 97-100 yen range. But if upcoming U.S. economic data continues to disappoint, there’s risk the dollar/yen’s trading range will ratchet down to say 95-98,” said Yoshio Takahashi, analyst at Barclays Capital in Tokyo.

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