* Short-covering lifts dollar index from 10-mth lows
* Euro, Aussie fall against U.S. dollar
* Uncertainty whether QE2 has been fully priced in
(Updates prices, adds detail)
By Anirban Nag
LONDON, Oct 18 (Reuters) - The dollar bounced from a 10-month low against a basket of currencies on Monday, as investors trimmed bearish bets on the greenback on uncertainty over how far the Federal Reserve will go in easing monetary policy.
The dollar extended a rebound that started late last week,
with the euro retreating from an 8-1/2 month high and the
Australian dollar
Traders said short-term speculation and model accounts and Asian central banks were active in the session as the euro fell as low as $1.3830. Next downside targets are technical support at $1.3825 and then the Oct. 12 low of $1.3775.
The dollar index <=USD> <.DXY> was up 0.4 percent at 77.357, after rising to 77.645 during morning trade. It was seen needing to move above its Oct. 12 high of 77.93 to signal a short-term bottom may be in place after Friday's 10-month trough of 76.144.
The index has lost nearly 5 percent in the past month as investors increased their bets against the dollar on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.
"The dollar's move down has been extremely aggressive and there are investors wondering whether or not too much quantitative easing has been priced in," said Jane Foley, senior currency strategist at Rabobank.
"The dollar has been sold off in recent weeks but there are plenty of opportunities to book profits. So I expect to see some choppiness ahead of the next Fed meeting in November."
Market players were also trimming their bets against the dollar ahead of a forthcoming G20 meeting and before hedge funds' book closings at the end of November, analysts said.
The euro was down 0.6 percent on the day at $1.3894
Data from the U.S. Commodity Futures Trading Commission showed speculators trimmed bets against the dollar in the latest week but still had hefty wagers against it. [IMM/FX]
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"Graphics on net U.S. dollar long positions
http://r.reuters.com/kus26k
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QE PRICED IN?
Federal Reserve Chairman Ben Bernanke on Friday offered his most explicit signal yet that the U.S. central bank was set to ease monetary policy further. [ID:nN15187998].
Two more Fed officials joined in, arguing for further aggressive action as U.S. inflation unexpectedly slowed in September even as retail sales picked up. [ID:nN16208445].
"More and more Fed officials are signing up for QE and if anything, this short squeeze in the dollar looks to be temporary," said Neil Mellor, currency strategist at Bank of New York Mellon. "The Fed is trying to bring about price stability and generate some inflation in the economy by flooding the market with more dollars. So the dollar is headed lower."
The dollar's moves have recently been highly correlated with
10-year Treasury yields
But the dollar ceded ground against the yen, falling 0.3
percent to 81.20 yen
The Australian dollar fell 0.4 percent to $0.9857
(Editing by Catherine Evans, John Stonestreet)