Dollar eases in London

The dollar eased on Friday in a paring of long positions before a much anticipated speech from the head of the Federal Reserve, with some expecting the greenback to bounce if he does not signal a chance of further monetary stimulus. The euro edged up 0.4 percent on the day to $1.4430, while higher-yielding currencies like the Australian and New Zealand dollars also advanced.
Markets have see-sawed this week, reflecting a divide over expectations of how strong a signal Ben Bernanke may provide on the chances of more monetary easing in the coming months when he speaks at 1400 GMT in a speech in Jackson Hole, Wyoming. Earlier this week, there was strong speculation Bernanke might announce a third round of asset purchases or some other extraordinary policy, pressuring the dollar. But this view has been scaled back, giving the greenback a boost on Thursday.
"If Bernanke signals he is likely to be less accommodative about providing liquidity, we could see the dollar recover and depending on how Wall Street reacts to that, we could see some flows into the greenback," said Roberto Mialich, FX strategist at Unicredit in Milan.
"On the other hand, if he signals that he is ready to act and provide more (economic) support, then the dollar will weaken. If he says he is ready to act but not right now, I don't think the markets will be too disappointed." He added even if the markets were disappointed, the euro was unlikely to fall below $1.43, while on the topside it could rise as high as $1.4550.
More quantitative easing would flood the financial system with more dollars and likely boosting stocks, higher yielding currencies and the euro. Part of the reason why investors have pared back their expectations of something dramatic from Bernanke is the realisation that despite sharp falls in stock markets, US inflation is higher. Though growth remains weak, Fed officials do not appear particularly concerned about recession risks.
The euro was supported, brushing off rising Greek credit default swaps although offers from Asian sovereign names above $1.4460 and through $1.4490 blunted a push higher. Stop-loss orders were cited above $1.4520. On the downside, bids from Asian sovereign investors would limit losses at around $1.4400. Slight weakness against the euro prodded the dollar index down 0.4 percent to 74.00.
Many traders said their euro/dollar positions were largely square before Bernanke's speech, with some seeing the risk of selling in the euro to around $1.43 as an initial reaction. Others said they may pick up the euro on a fall to $1.4250. Some analysts said they expected mild dollar selling if the Fed boosts investor confidence that it is prepared to loosen policy if the global economic outlook deteriorates, without committing to easing measures for the moment.
"For the dollar to rally you need risk aversion," said Peter Frank, currency strategist at Societe Generale. The dollar traded 0.7 percent lower at 76.95 yen, coming off a two-week high of 77.70 yen struck on Thursday. It hit a record low of 75.941 yen a week ago, giving rise to jitters that Tokyo would intervene in currency markets for the second time in less than a month.