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

SIngapore (Oct 28) The dollar licked its wounds on Monday, steadying against major counterparts before the U.S. Federal Reserve's policy-setting meeting following a testing week in which it tumbled to two-year lows against the euro.

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

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

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

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

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

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

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

The euro held steady at about $1.3808, after having risen to as high as $1.3833 on Friday, its highest since November 2011 on trading platform EBS.

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

The euro remained buoyant despite downbeat German Ifo business sentiment data on Friday, which unexpectedly showed a decline for the first time in six months.

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

The euro's rise on Friday had only been stopped by market talk of an option barrier at $1.3850 and possible euro-selling interest 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 of 78.998 touched on Friday.

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

The dollar remained supported against the yen on the view that the yield differential between Japanese government bonds and U.S. Treasuries will persist, as the Fed eventually moves toward tapering its stimulus while the Bank of Japan maintains its ultra-easy stance.

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

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