April 30, 2013 / 1:16 AM / 5 years ago

USD on the defensive as Fed outcome looms

SYDNEY (Reuters) - The dollar languished at a two-month low against a basket of currencies in early Asian trade on Wednesday as investors wagered the U.S. central bank will recommit to its aggressive stimulus program, with a chance of expanding it even.

Euro and U.S. dollar banknotes are seen in this picture illustration taken in Prague January 23, 2013. REUTERS/David W Cerny

The dollar index was at 81.701.DXY, having shed more than 0.5 percent at one stage to a low of 81.598. The break below 81.744, the 38.2 percent retracement of its January-April rally, has opened the way to 81.204, the 50 percent retracement level.

Dollar bears shrugged off a rise in U.S. home prices and a rebound in U.S. consumer confidence, focusing instead on an unexpected contraction in Midwest business activity.

The data came as Federal Reserve policymakers gathered for a two-day meeting amid talk the central bank might have to add more stimulus to help widen a still patchy economic recovery.

“We see the risks as titled on the dovish side as the Fed is now effectively falling short on both its employment and inflation objectives,” said Vassili Serebriakov, strategist at BNP Paribas.

“We expect this week’s meeting to support our view that no QE3 tapering is likely until year-end and that the risk is for more, not less, easing.”

Serebriakov said such an outcome would support the view that the U.S. dollar will be used as a key funding currency for risk trades, along with the yen.

Japanese 10,000 yen notes line up in Tokyo, in this February 28, 2013 picture illustration. REUTERS/Shohei Miyano

The dollar drifted lower on the yen to 97.43, but remained not far from a 4-year high near 100 reached last month. The yen had been under intense pressure thanks to the Bank of Japan’s own radical stimulus program.

The greenback lost ground against the euro, which climbed to a two-week high near $1.3187. The common currency now faces tough resistance around $1.3200, a level that capped it last month.

A businessman looks at a screen displaying a photo of U.S. 100 dollar bank notes in Tokyo April 8, 2013. REUTERS/Toru Hanai

The euro’s strength was surprising as euro zone data has been just as disappointing as that from the U.S. and added to pressure for a cut in interest rates by the European Central Bank on Thursday.

Among the best performers, the Australian dollar extended its gains to a two-week high of $1.0386. It was last$1.0366.

The Aussie appeared to be gearing up for another go at stiff resistance seen near $1.0400, an area containing several key chart levels including the 50 percent retracement of its April 11-23 decline.

Traders said only an upside surprise in China’s manufacturing data, due at 9.00 a.m. ET, will give the Aussie enough momentum to break higher. China is Australia’s single biggest export market.

However, chances are slim given a preliminary report by HSBC last month showed growth in China’s vast factory sector dipped in April as new export orders shrank.

Editing by Wayne Cole

Our Standards:The Thomson Reuters Trust Principles.
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