The dollar eased versus a basket of currencies on Tuesday but its losses were limited, supported by the view that the US Federal Reserve is likely to be the first among major central banks to move away from ultra-loose monetary policy. Many traders were cautious about being too long in the dollar ahead of testimony on Wednesday by Fed Chairman Ben Bernanke, whose surprisingly dovish tone last week caused panic selling in the US currency.
Many market players think Wednesday's testimony is unlikely to change expectations that the Fed will start reducing its bond buying later this year and halt it completely by mid-2014. "The testimony is a venue to explain the Fed board's thinking, rather than Bernanke's own ideas. So I would expect his remarks to be a bit more hawkish than last week," said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
The dollar index eased 0.1 percent to 82.962. It had set a three-year high of 84.753 on July 9, the day before Bernanke's comments sparked a pull back in the currency. The index had risen to as high as 83.46 on Monday but its gains were trimmed after data showed US retail sales rose less than expected in June, denting expectations of an imminent reduction in stimulus by the Fed. The dollar eased 0.1 percent against the yen to 99.76 yen , staying above last week's low of 98.20 yen. An immediate resistance level is seen at 101.54 yen, its July 8 peak.
The yen could face more pressure towards the weekend on expectations that Japan's upper house election on Sunday will hand Prime Minister Shinzo Abe a big victory, giving him more freedom to push forward with his agenda to revive the economy through monetary easing. "I feel markets expect no less than a resounding endorsement for PM Abe to carry out his policies further without any hindrance to get Japan out of the deflationary spiral," said a trader for a Japanese bank in Singapore.
The trader said he thought the dollar would eventually head higher towards 105.00 yen, but added that such a move was unlikely to occur in the near term. The euro edged up 0.2 percent to about $1.3084. Elsewhere, the Australian dollar bounced as market players trimmed back bets on further interest rate cuts following comments from the central bank. The Aussie rose after the Reserve Bank of Australia said in the minutes of its July meeting that the current policy stance was appropriate for the timing.
Markets interpreted the minutes as showing less urgency to cut interest rates than some had anticipated. Swap rates shaved the probability of a rate cut in August to 53 percent, from 63 percent. The RBA minutes implied a less dovish outlook and gave a lift to the Aussie dollar, said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore. "Combined with a lot of stop losses between $0.9130 to $0.9170, we saw a sharp jump," Halley said, adding that there were more stop-loss bids for the Australian dollar on the topside. The Australian dollar rose 0.9 percent on the day to $0.9186, pulling away from Friday's three-year low of $0.8998.
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