Dollar dips after Bernanke but losses limited

LONDON: The dollar edged lower against a basket of major currencies on Monday as investors speculated the Federal Reserve may offer more stimulus next month, though its losses were limited as demand for riskier currencies started to wane.

The impact of Hurricane Irene -- downgraded to a post-tropical cyclone as it hit New York -- was set to hamper early US trading activity and keep volumes thin. European trading was quiet with UK markets closed for a public holiday.

While Fed Chairman Ben Bernanke gave no details of further action to boost the US recovery at an eagerly anticipated speech on Friday, he said the central bank would extend its September policy meeting to two days to consider its options.

That gave a boost to US stocks on Friday, and the more positive tone spilled over into Asia and European bourses on Monday in thin trade.

The dollar was down 0.2 percent against a basket of currencies at 73.694 , while the euro eased back from an early two-month high of $1.4550 as the risk-on sentiment triggered by Bernanke's cautiously optimistic outlook faded.

It was last flat on the day at $1.4501 with good support seen around the 100-day moving average at $1.4366.

"The fact that Bernanke did not talk about inflation risk has helped equity markets and put pressure on the dollar," said Manuel Oliveri, currency strategist at UBS in Zurich.

"But there is not much more potential for the dollar to sell off, with markets now focusing on FOMC minutes and the US employment report this week," he said.

Analysts said despite the unusual two-day Fed meeting in September, the hurdle is high for introducing more monetary easing due to a rise in core inflation and a split regarding the policy within the Fed.

Market expectations for a fresh round of bond buying had eased in the leadup to the central bank's annual symposium at Jackson Hole, Wyoming, so the fact that Bernanke did not announce any immediate action was not a major disappointment, traders said.

This leaves the focus squarely on upcoming data including the closely watched non-farm payrolls data due on Friday as well as numbers on US personal spending and manufacturing for clues about the health of the world's largest economy.

"Bernanke was long-term positive which put the market in quite a strong risk-on mode but this will probably not hold, it is already being corrected," said Ulrich Leuchtmann, head of FX research at Commerzbank.

"There is quite important data out of the US this week which could indicate a not very broad recovery. We think the optimism after Bernanke's speech was overdone."

The options market pointed to calmer trading ahead and a fall in demand for protection from volatility, with short-dated vols falling across the board. Euro/dollar one-month vols were trading around 12.7 percent, down from 13.7 percent before Bernanke's speech on Friday.

SWISS FRANC FALLS

The euro rose over 1 percent in thin volumes to last trade at 1.1832 francs , nearing resistance at 1.1894, the July 22 high, while the dollar was up 1.1 percent at 0.8134 francs, near a one-month high of 0.8161 francs.

The franc was under broad pressure after Swiss bank UBS threatened on Friday to charge clients a fee on deposits, aiming to discourage them from using some accounts to hoard the safe-haven currency because of financial market volatility.

Concerns that the global economy would fall back into recession and fears that the euro zone's sovereign debt crisis could spread to the region's banking system have sent currency investors scurrying to the safety of the franc and yen.

This has prompted both the Swiss and Japanese authorities to act in recent weeks to temper the strength of their respective currencies.

While the Swiss National Bank said it was not involved in UBS's decision to consider imposing a fee, traders said the move posed a fresh hurdle for franc bulls.

Against the yen, the dollar traded flat at 76.58 yen , recoiling from a recent high around 77.69 but holding above the record low plumbed earlier this month at 75.941 yen.

Copyright Reuters, 2011