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FOREX-Dollar firmer before Fed, but tone stays defensive

Published 08/09/2010, 10:02 AM
Updated 08/09/2010, 10:04 AM

* Greenback stays defensive after Friday's U.S. jobs data

* Market players wary before FOMC on Tuesday

* Euro near 3-mth peak vs dollar; Yen near 15-yr highs (Adds quote, updates prices, changes byline, changes dateline, previous LONDON)

By Wanfeng Zhou

NEW YORK, Aug 9 (Reuters) - The dollar edged higher against major currencies on Monday, coming off Friday's lows as wary investors lightened positions ahead of a Federal Reserve interest rate announcement.

But the dollar stayed on the defensive, as disappointing U.S. jobs data on Friday highlighted a weakening U.S. economic outlook and added to speculation about further monetary easing.

Market players refrained from chasing prices aggressively, having already priced in some form of modest easing at the Federal Reserve's policy meeting on Tuesday. This kept major currencies within fairly tight ranges.

"Investors are likely to consolidate positions ahead of tomorrow afternoon's FOMC policy meeting," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"While some risk of new policy action is already priced into the greenback's valuation, more stimulus would make a dollar recovery difficult in the near-term."

In early New York trading, the euro fell 0.3 percent to $1.3246, not far from a three-month peak of $1.3334 struck on electronic trading platform EBS on Friday.

The euro added to losses after it failed to hold above the $1.33 level and stops were triggered at $1.3250 and $1.3240, traders said.

The dollar's general weakness could keep the euro buoyant in the near term, but profit-taking is expected to increase as the euro approaches the psychologically key $1.3500 level.

That level almost coincides with a 50 percent retracement of the single European currency's fall from a November peak of $1.5145 to a four-year trough of $1.1876 hit in June.

Traders also kept a close eye on the yen, which rose to 85.02 yen versus the dollar on trading platform EBS on Friday, just shy of a 15-year peak of 84.82 yen hit last November.

The dollar rose 0.2 percent to 85.68 yen.

There were substantial automatic "stop loss" trades that would be triggered just under option barriers at 85.00 yen, potentially triggering a slide further, traders said. More stops were sitting below 84.82 yen, with option barriers at 84.75 yen seen rolling off later in the week, they said.

SHORT DOLLAR POSITIONS

Data showed currency speculators increased bets against the U.S. dollar in the latest week and increased their net yen long positions to the highest level since December.

The dollar edged up 0.3 percent against a basket of currencies to 80.621. Support was seen at the April low of 80.031 and then the March trough of 79.507, traders said.

"It would be a shock were the Fed to go beyond stating that it will re-invest maturing mortgage-based securities, preventing its $2.3 trillion balance sheet from shrinking," said Tom Levinson, currency strategist at ING.

"A downgrading of its economic and inflation assessment may be considered a potential precursor to renewed action in coming months should things not start to improve," he added.

Data on Friday showed that overall U.S. non-farm payrolls fell 131,000 in July, while private employment, a better gauge of labor market health, rose a modest 71,000, below forecasts for a gain of 90,000.

By contrast, data on Monday suggested the euro zone was in better shape. Euro zone investor morale surged while German exports rose more than forecast. (Additional reporting by Tamawa Desai in London; Editing by Andrea Ricci )

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