FOREX-Dollar steadies after selloff; focus on Fed, China money rates

Reuters

* Euro trades slightly below 2-year high against dollar

* Fed meeting could fuel more dollar selling - analyst

By Lisa Twaronite and Masayuki Kitano

TOKYO/SINGAPORE, Oct 28 (Reuters) - The dollar licked itswounds on Monday, steadying against major counterparts beforethe U.S. Federal Reserve's policy-setting meeting following atesting week in which it tumbled to two-year lows against theeuro.

Economists and market participants widely expect FederalOpen Market Committee members, meeting on Tuesday and Wednesday,to keep the Fed's bond-buying stimulus unchanged at $85 billionper month.

Most expect the central bank to delay tapering its stimulusuntil at least March next year.

"I think everyone expects it to be dovish," said GarethBerry, Singapore-based G10 FX strategist for UBS, referring tothe Fed's meeting this week.

"In fact, there's every likelihood that we'll see the Fedcommunicate a willingness to delay before they taper," he said."That would confirm market expectations and would probably leadto an extension of this dollar weakness that we've been seeingover the last week or so."

Investors will also keep a wary eye on Chinese short-termrates, after they surged last week to their highest level sincea June credit crunch.

"For the coming week, the market will continue to focus onthe development in China's money market and the outcome of theU.S. economic data/FOMC rate decision," strategists at Barclayssaid in a note to clients.

"While the consensus forecast now looks for March 2014tapering, their policy decision is ultimately data-dependent andincoming U.S. data are worthy of close attention," they added.

The euro held steady at about $1.3808, after havingrisen to as high as $1.3833 on Friday, its highest sinceNovember 2011 on trading platform EBS.

The euro is testing resistance right at Friday's high, whichcoincides with the 61.8 percent retracement of its May 2011 toJuly 2012 decline.

The euro remained buoyant despite downbeat German Ifobusiness sentiment data on Friday, which unexpectedly showed adecline for the first time in six months.

For the euro, "we have seen one critical level after anotherbreaking with no visible pullback nor correction," said a traderfor a Japanese bank in Singapore.

The euro's rise on Friday had only been stopped by markettalk of an option barrier at $1.3850 and possible euro-sellinginterest related to that, the trader added.

Against a basket of currencies, the dollar held steady at 79.205, but still not far from a near nine-month low of78.998 touched on Friday.

The dollar added 0.3 percent against the yen to about 97.63yen, edging away from a more than two-week low of 96.94yen hit on Friday.

The dollar remained supported against the yen on the viewthat the yield differential between Japanese government bondsand U.S. Treasuries will persist, as the Fed eventually movestoward tapering its stimulus while the Bank of Japan maintainsits 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.

At that meeting, the BOJ will also release its latestlong-term economic forecasts. Sources close to the central bankhave told Reuters that it is expected to revise up economicgrowth for the fiscal year beginning in April 2014 to around 1.5percent from the current 1.3 percent.

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