June 25, 2013 / 2:42 AM / 4 years ago

FOREX-Fed officials put brakes on dollar rally; China markets eyed

* Dollar index retreats from near three-week highs

* Fed officials play down fears of imminent stimulus withdrawal

* Aussie recovers slightly from 33-month trough

* U.S. data in focus later in the session

By Lisa Twaronite and Ian Chua

TOKYO/SYDNEY, June 25 (Reuters) - The dollar’s rally paused in Asia on Tuesday after two top Federal Reserve officials downplayed market fears of an imminent end to stimulus, though it remained supported by worries of the impact of tightening Chinese credit.

China shares suffered their worst daily loss in almost four years in the previous session as the authorities seek to rein in excessive credit growth, raising concerns about a potential money market squeeze.

“There are still worries in China, and investors will continue to pay close attention to developments there,” said Ayako Sera, senior market economist at Sumitomo Trust Bank in Tokyo.

But the benchmark U.S. Treasury yield is down from a nearly two-year high touched in the previous session, she said, and that has also helped curb the dollar’s ascent.

The dollar and U.S. yields came off their peaks after Minneapolis Fed President Narayana Kocherlakota and Dallas Fed head Richard Fisher both reassured investors who feared the impact of the Fed tapering its monthly $85 billion bond-buying programme.

Kocherlakota said financial markets are wrong to view the Fed as having become more hawkish, while Fisher said the Fed would still be running an accommodative policy even if it reduces stimulus.

Fed Chairman Ben Bernanke said last week that the central bank could trim its bond-buying programme later this year if the economy continues to improve as it expected. That helped propel the dollar index to a near three-week peak of 82.841 on Monday.

The index was last up 0.1 percent from late U.S. trading at 82.470.

The euro was steady from late U.S. levels at $1.3121, pulling up from a low of $1.3058 on the EBS trading platform on Monday, its weakest level since June 5.

The dollar was slightly higher against its Japanese counterpart at 97.82 yen, but well off Monday’s two-week high of 98.72 yen. U.S. funds continued to buy the dollar against the yen, market participants said.

The upcoming U.S. data will take on greater relevance in light of the Fed’s message that the outlook for stimulus will be tied to how the economy fares in coming months. Durable goods, consumer confidence and housing data are all due later in the day.

The pullback in the dollar was most dramatic against commodity currencies, which have been among the hardest hit as investors rushed to unwind carry trades on the prospect of higher U.S. rates.

The Australian dollar rose 0.2 percent to $0.9265, having plumbed to a 33-month trough of $0.9145 on Monday, according to Reuters data. In two short months, it has shed more than 10 percent against the dollar.

Resistance now lies at the June 11 low of $0.9324, though some market participants believe the Aussie remains under pressure and could test the downside first.

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