(Changes “weakness” regarding yen in 16th paragraph to “strength”)
* San Francisco Fed’s Williams say Fed could end QE this year
* Dollar index near its July peak
* Aussie and Kiwi skid, led by yen cross selling
* Dollar/yen near 4 1/2-year high, euro/dollar near 6-week low
By Sophie Knight and Hideyuki Sano
TOKYO, May 17 (Reuters) - The U.S. dollar held firm near a 10-month high against a basket of currencies on Friday after a regional Fed chief said the U.S. central bank could begin easing up on stimulus this summer, sharpening the high-yielding Aussie’s fall.
The remarks by John Williams, the president of the Federal Reserve Bank of San Francisco, moved markets as investors see his thinking similar to that of the Fed’s top officials such as Chairman Ben Bernanke and Vice Chair Janet Yellen.
“At the previous policy meeting, the Fed essentially said whether it will reduce or expand its bond buying is 50-50. But markets are now suspicious that Bernanke may signal it’s something like 55-45 when he testifies in the congress on May 22,” said Minori Uchida, chief FX analyst at the Bank of Tokyo-Mitsubishi UFJ.
The dollar index , which measures the currency’s value against a basket of six major currencies, gained 0.4 percent to 83.901, approaching a 10-month high of 84.094 set on Wednesday.
A break of its July peak of 84.100 could open the way for a test of 84.929, a 76.4 percent retracement of its fall from 2010 peak of 88.708 to near a three-year low of 72.696 hit in 2011.
But Mitsubishi’s Uchida said barring further evidence the Fed is moving towards scaling back stimulus, the dollar index could peak out around the current level.
“U.S. bond prices gained sharply yesterday despite William’s comments. Each market has its own interpretation now and there’s no broad consensus on the Fed’s stance yet,” he said.
Speculation about the Fed’s possible exit from stimulus is having the most pronounced impact on the Australian dollar, which has enjoyed the status of highest-yielding major currency for years.
Having already lost 2.1 percent on the week by late U.S. levels, the Aussie skidded further on Friday, shedding 0.6 percent to $0.9759 to an 11-month low. If it closes below $0.9871, it would mark its first weekly close below its 200-week average since July 2009.
The currency’s 5.7 percent tumble this month accounts for nearly all of its 6 percent loss on the year, as a fall in commodity prices in recent months raises concerns about a slowdown in China, the biggest buyer of Australia’s natural resource exports.
Implied volatilities on the Aussie have shot up in the past few days, with one-month volatility near an eight-month high , suggesting investors are expecting mercurial trade ahead.
“We’ve been seeing some Japanese selling in the kiwi and the Aussie, and we see some profit taking on yen crosses,” said Tim Kelleher, head of institutional FX sales at ASB.
Against the yen, the Australian dollar lost 0.4 percent to 99.87, its lowest since May 2. The New Zealand dollar sagged in sympathy, dropping 0.5 percent to 82.89 yen .
“The kiwi has an overhang of some stale longs, so the risk is that the kiwi will fall harder and faster than the Aussie,” Kelleher said.
The New Zealand dollar suffered a 0.7 percent drop against the greenback to $0.8101, its lowest in six months.
Despite its strength against the Antipodean currencies, the yen was relatively steady against the dollar, which fetched 102.290 yen, near Wednesday’s 4-1/2-year high of 102.77 yen.
Patchy U.S. data is still blunting the dollar’s gains, with Thursday a case in point. Factory activity in the U.S. mid-Atlantic region contracted in May as new orders fell to their lowest level in almost a year, while new claims for jobless benefits spiked.
It was a fall in jobless claims data last week that helped the dollar over the psychological and technical hurdle of 100 yen. The next block of resistance lies around 103 yen, analysts say.
“Exporters now have a lot of stops around 103, so although it’s close it actually seems quite far away,” said Kenichi Asada, manager of FX at Trust & Custody Services Bank.
“But like the 100 level, which a lot of people said it wouldn’t reach due to the stops around 99.5, it might break through- possibly if there is something more concrete about the end of QE in the FOMC minutes released next week.”
A resurgent dollar pushed the euro near a six-week low.
The common currency stood at $1.2860, near a six-week low of $1.2843 touched on Wednesday. (Editing by Eric Meijer and Sanjeev Miglani)