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Wednesday October 27, 2010 - 10:17:24 GMT
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FOREX NEWS - Dollar gains as short positions cut before Fed

6:10am EDT

* Dollar rises to 2-week high vs yen, 1-wk high vs euro

* Fed eyes gradual bond buys; several hundred bln dlrs -WSJ

* ECB allots more-than-f'cast 42.4 bln eur in 3-mth tender

(Adds quotes, updates prices)

By Tamawa Desai

LONDON, Oct 27 (Reuters) - The dollar rose broadly on Wednesday as speculation the U.S. Federal Reserve would take a gradualist approach to more quantitative easing next week prompted players to liquidate some short dollar positions.

The dollar was pushed up to a two-week high against the yen and a one-week peak versus the euro, which was also impacted by euro zone banks taking up more cheap funding than expected at a three-month ECB tender. The greenback also rose against the Swiss franc and Australian dollar.

The Wall Street Journal said the Fed would make bond purchases worth a few hundred billion dollars over several months, which compared with investors' base-case scenario for an initial commitment to buy at least $500 billion. [ID:nTOE69Q02H]

In a Reuters survey earlier this month, U.S. primary dealers' projections for the size of the Fed's expected quantitative easing at its next policy meeting on Nov. 2-3 had ranged from $500 billion to $1.5 trillion. [FED/R]

"Expectations have been pared that the Fed ... would be more aggressive," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ, adding the euro could drop back to around $1.35 in the next month or two.

By 0935 GMT, the euro fell 0.3 percent to $1.3819 EUR=, after falling to a $1.3772 as a break though an option barrier at $1.3800 accelerated selling.

The single currency was also hurt as results of the European Central Bank's first indexed three-month refinancing operation showed a larger-than-expected take-up of 42 billion euros from European banks for cheap funding. [ID:nLDE69Q0XN]

But some said the dollar's rebound may be limited.

"There is not great downside potential (for the euro) as the Fed is adopting a looser monetary policy while the direction of the European Central Bank seems to be the opposite," said Roberto Mialich, currency strategist at Unicredit in Milan.

Traders said there were likely to be bids for the euro at around $1.3750/60. One major support may be at around $1.3787, a 76.4 percent retracement of its latest rebound from the low around $1.37 to Monday's high.


PDF on G20's uneasy truce:

FX column on the Fed: [ID:nLDE69L1EY] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>


The dollar was also supported by a rise in U.S. Treasury yields, with the benchmark 10-year yield US10YT=RR rising to one-month highs above 2.6 percent on Tuesday.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was up 0.1 percent at 77.79 .DXY.

Adrian Schmidt, forex strategist at Lloyds TSB, said the index was likely to rebound to 79.00 over the next two weeks, a high last hit at the end of September.

"The rise is primarily positioning - everyone is short. But to some extent it's also valuation - the dollar is cheap particularly against the yen, the Swiss franc and the Aussie," he said.

Against the yen, the dollar rose as high as 81.98 yen JPY=, pulling further away from a 15-year low of 80.41 yen struck earlier this week on trading platform EBS.

But gains could be limited as "there are quite a lot of dollar-selling orders from Japanese exporters at the 82 yen level," one Japanese trader said.

Others said a fair amount of overnight 82.00 yen strikes were bought on Tuesday, suggesting that area could be sticky into Wednesday's 1400 GMT cut -- when many trades expire. Option-related stops are then highlighted at 82.15 yen.

The Australian dollar fell 1.2 percent to $0.9736 AUD=D4, after Australian consumer prices rose by less than expected last quarter, reducing chances of an interest rate rise next week.

The Norwegian central bank will hold a policy meeting on Wednesday where markets expect no change in policy but will focus on the central bank's rate path.

(Additional reporting by Nia Williams; Editing by Patrick Graham, John Stonestreet)

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