FOREX-Dollar index weakens, Fed view may accelerate selloff


* Euro trades slightly below 2-year high against dollar

* Fed meeting could fuel more dollar selling

* Dollar/yen edges up, rate differentials underpin pair

By Anirban Nag

LONDON, Oct 28 (Reuters) - The dollar fell towards anine-month low against a basket of currencies on Monday, withmore investors selling on growing confidence the Federal Reservewill keep policy accommodative.

The Federal Reserve starts its two-day policy meeting onTuesday and is widely expected to keep its bond-buying stimulusunchanged at $85 billion per month. Most expect the central bankto delay withdrawing stimulus until March 2014.

The dollar index was at 79.176, not far from a nearnine-month low of 78.998 touched on Friday. The longer the Fedkeeps policy accommodative, the more U.S. yields stay anchored,making the dollar less attractive to hold.

The dollar's weakness saw the euro trade up at $1.3815, having risen to $1.3833 on Friday, its highest sinceNovember 2011 on trading platform EBS.

Investors are a bit wary of pushing the euro much higher,worried that policymakers from the European Central Bank may tryto talk down the currency in coming days.

Speculation that ECB policymakers may step in verbally hasgained pace especially after recent economic data, includingGerman business confidence and purchasing managers' indexsurveys, highlighted the fragile economic recovery.

"Eurozone policymaker concern is probably the biggestrestraint for a euro/dollar that looks technically mobile towardthe $1.3980/4000 area," said Tom Levinson, currency strategistat ING. "The dollar index looks primed for a test of support inthe 78.60/90 area in coming days."

Most expect the Fed to express concerns about the economy,especially after the 16-day government shutdown that has hurteconomic growth and hit business confidence. With arch-doveJanet Yellen set to takeover from Chairman Ben Bernanke, despitesenator Rand Paul's threats to put on hold her nomination, thedollar is set to struggle in coming months.

"There's every likelihood that we'll see the Fed communicatea willingness to delay before they taper," said Gareth Berry,Singapore-based G10 FX strategist for UBS, referring to theFed's meeting this week.

"That would confirm market expectations and would probablylead to an extension of this dollar weakness."

While the dollar is likely to struggle against the euro andthe British pound, it is likely to gain ground against the yen.

The dollar rose 0.2 percent to 97.60 yen, edging awayfrom a more than two-week low of 96.94 yen hit on Friday.

The dollar was supported on the view that yielddifferentials between Japanese government bonds and U.S.Treasuries will persist, as the Fed eventually moves towardtapering while the Bank of Japan keeps its ultra-easy stance.

The BOJ is widely expected to maintain its monetary policystimulus at its policy review on Thursday to meet its target oftwo percent inflation in two years.

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