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FOREX-Dollar resumes downtrend after worst week since May

·3 min read

* Dollar back towards one-month low; no euro reaction to PMI

* Aussie and pound in focus before central bank meetings

* Yuan steady off 3-1/2 month lows, cbank pledges "prudent, flexible" policy

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Sujata Rao

LONDON, Aug 2 (Reuters) - The dollar lurched lower on Monday, back towards the one-month lows hit last week when it became clear the Fed was in no hurry to tighten policy and policymakers broadly shared Chairman Jerome Powell's view that rate rises were "a ways away".

Data from the U.S. CFTC shows speculators rowed back into the dollar in the week through July 27, with net dollar longs at $3.56 billion, the largest since last March. However, that was before the outcome of the Federal Reserve meeting where the message was unequivocally dovish.

U.S. Treasury bond yields fell after the meeting, and real yields -- adjusted for inflation -- hit record lows . The Fed's dovish post-meeting statement was echoed by Fed Governor Lael Brainard who said on Friday "employment has some distance to go".

The dollar index eased 0.14% to 91.98 by 0830 GMT, just off Friday's one-month low of 91.775. The index dropped 0.88% last week, its worst since early-May.

Earlier in July, it touched a 3-1/2-month high at 93.194 as traders had positioned for a speedy start to tapering.

Societe Generale strategist Kenneth Broux expects the dollar to trade in a range until the Fed's Jackson hole summit where many reckon it will signal the timing to start winding down stimulus.

"The dollar has had a very good few weeks and we are up 4% from the lows so some consolidation is in order," Broux said.

Markets are awaiting the July non-farm payrolls report, due on Friday, the last major jobs report before Jackson Hole. A Reuters poll forecast a 926,000 increase, the biggest for 11 months.

Broux said, however, while there could be "a bit of noise around the payrolls, in August it's all about (thin) liquidity and what message China will send".

He was referring to Beijing's recent crackdowns on a range of sectors, which caused outflows from Chinese stocks and spillovers worldwide. It also helped push the yuan to three month lows against the dollar.

While markets have since steadied and the yuan recovered to around 6.46, China's central bank pledged over the weekend to maintain a prudent, flexible and targeted monetary policy, a sign of more easing to come.

Data showed Chinese factory activity growth slowed in July.

The euro showed little reaction to a Purchasing Managers Index (PMI) reading of July manufacturing at 62.8, a touch above the "flash" number of 62.6. The data follows last week's data showing inflation shooting past the European Central Bank's 2% target.

The euro firmed 0.16% at $1.1885 having last week risen as high as $1.1909.

NatWest analysts said "exit strategies", from stimulus as well as lockdowns, would drive currencies in the near-term.

"While highly vaccinated Europe should do well on one of those fronts, an eternally dovish ECB leaves us still seeing the euro as a good funding currency," they said.

With that in mind, investors will watch this week's meetings at the Bank of England and Reserve Bank of Australia.

While sterling is supported by the possibility of an early end to BOE stimulus, the Aussie dollar may take a hit if the RBA backtracks on its previous decision to taper stimulus as protracted COVID-19 lockdowns drag on growth.

The Aussie was up slightly at $0.7356.

"I see no point chasing the Aussie higher in the short-run if China is cracking down on commodity prices and there is no acceleration in (Australia's) vaccine progress," Broux added.

(Reporting by Sujata Rao Additional reporting by Kevin Buckland in Tokyo Editing by Peter Graff)