July 11, 2013 / 4:11 PM / 6 years ago

FOREX-Dollar falls as markets reassess Fed plans to scale back stimulus

* Dollar falls after Bernanke comments, but uptrend intact

* Bernanke says Fed to continue accommodative policy

* U.S. mortgage rates reach two-year high

* BOJ holds rates, sounds optimistic on economy

By Julie Haviv

NEW YORK, July 11 (Reuters) - The dollar dropped against a swath of currencies on Thursday as remarks made by Federal Reserve Chairman Ben Bernanke assured investors the U.S. central bank was unlikely to scale back its asset purchase program earlier than expected.

After notching steep losses the previous day, investors continued to shed bullish bets on the dollar after Bernanke sought to assuage market fears by saying the Fed would continue its accommodative monetary policy due to low inflation and weakness in the labor market.

The Fed’s $85-billion monthly bond-buying program, known as quantitative easing, is tantamount to printing money. Investors had recently been piling on long dollar positions on expectations the Fed would reduce its monthly purchases in the coming months.

Minutes of the Fed’s last meeting, released Wednesday, showed that half of the bank’s policymakers believed the stimulus program should stop by the end of this year, but many wanted reassurance the U.S. jobs recovery was on solid ground before any policy retreat.

U.S. jobless claims data showed the number of Americans filing new claims for unemployment benefits rose last week, although the level still pointed to healing in the nation’s job market.

“Overall, this is a correction more than a reversal of a trend for the dollar,” said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C.

The most recent Commodity Futures Trading Commission data showed long-dollar positioning building into the end of the second quarter, but still below the peak seen in May, suggesting further upside for the greenback.

The dollar index, which tracks the greenback against a basket of six currencies, fell to 82.418, its lowest since June 25 and down 2.8 percent from a three-year high of 84.753 touched on Tuesday. It last traded down 1.3 percent at 82.978.

The movements of the U.S. dollar have been highly correlated to Treasury yields, which move inversely to price. Treasuries, as well as stocks, rallied on the perceived dovish comments from Bernanke.

Any push back in the timeline of Fed tapering will probably put downward pressure on yields and the dollar over the near-term. Higher yields could also impact the housing market’s recovery.

Mortgage finance company Freddie Mac said U.S. 30-year fixed-rate mortgages stood at 4.51 percent in the week ended July 11, the highest since July 2011, against 4.29 percent a week earlier.

“As long as European, U.K. and Japanese monetary officials are biased towards continued policy accommodation while the Fed is eyeing an exit strategy, the long-term trend of dollar strength should remain in tact,” Esiner said.

The general market view had been that the Fed could begin to scale back its massive stimulus program by September, but markets have been less certain about that time-frame after the release of the Fed minutes and Bernanke’s comments on Wednesday.

“The dramatic drop in the dollar highlights how one-sided (dollar bullish) the market had become and how quickly traders raced to close out long dollar positions,” said Camilla Sutton, chief foreign exchange strategist at Scotiabank in Toronto.

“The longer-term view remains unchanged, with monetary policy diverging between the U.S. and Europe, which should support the dollar into year-end; however ,the market had gotten ahead of itself with positioning,” she said.

Separate U.S. data showed prices for imports and exports fell in June for a fourth straight month, a sign of cooler economic growth worldwide that could weigh on the American economy and unnerve policymakers.

In late morning New York trade, the euro was up 0.5 percent against the dollar at $1.3042, having earlier risen to a three-week high of $1.3201.

The single currency has been under pressure as the European Central Bank last week clearly indicated it would keep interest rates low for an “extended period.” ECB policymaker Jens Weidmann, however, said Thursday the central bank could hike rates if inflationary pressures re-emerged.

The dollar extended losses after the Bank of Japan kept its policy on hold and had its most upbeat assessment in two and a half years. But analysts said the fall in the pair was likely to be short-lived.

The dollar dropped to a two-week low of 98.27 yen. It was last down 0.9 percent at 98.74 yen. Chartists said a weekly close above 98.75 yen would be a signal that the dollar is retaining its upward bias.

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