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Thursday October 28, 2010 - 10:51:50 GMT
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FOREX NEWS - Dollar slides, short-covering rally sputters

6:47am EDT

* Sliding Treasury yields weigh on U.S. currency

* Investors batten down for next week's Fed meet

(Adds comment, details, updates prices)

By Naomi Tajitsu

LONDON, Oct 28 (Reuters) - The dollar slipped on Thursday, relinquishing some of the gains made earlier this week as a short-covering rally ran out of steam and U.S. Treasury yields fell.

Traders said dollar selling against the euro and other currencies by reserve managers was also helping to push the U.S. currency down.

Investors trimmed extreme short dollar positions earlier this week as speculation the Federal Reserve might announce plans to buy more assets to stimulate the economy next week turned into a guessing game about how much they would purchase.

The New York Federal Reserve has surveyed bond dealers and investors over the size and impact of a quantitative easing programme, including scenarios ranging from zero up to $1 trillion, Bloomberg news reported on Thursday, citing a copy of the survey. [ID:nLDE69R15M]

The dollar rally has lost steam in the absence of market-moving news, and analysts said the currency would stay under selling pressure if the Fed says it will continue to pump money into the market to improve liquidity and help the economy.

"We'd seen a short squeeze in the dollar in the past few days due to an exhaustion in positioning, but when there's no incentive to maintain that, you get some profit taking," said Peter Frank, currency strategist at Societe Generale.

"The issue is whether the market believes the Fed will deliver significant quantitative easing over a definitive time line. If they do, the dollar will weaken."

A Reuters poll showed Wall Street analysts expect the Federal Reserve to buy between $80 billion and $100 billion worth of assets per month under a new programme widely expected to be unveiled on Nov. 3. [FED/R]

Other analysts said the dollar was also weighed down by a narrowing in spreads between 10-year U.S. and euro zone government bond, which was driven by a fall in U.S. Treasury yields that put the brakes on a widening seen in the past week.

By 1025 GMT, the euro EUR= had risen 0.5 percent on the day to $1.3835, having climbed to a session high around $1.3850 in early European trade. This helped to push the dollar .DXY 0.5 percent lower versus a currency basket.

"We're seeing some consolidation in the dollar before the Fed meeting as no one knows how much QE the Fed might do," said Marcus Hettinger, global currency strategist at Credit Suisse in Zurich.


The euro held above a one-week low around $1.3730 hit on Wednesday, even as ongoing debt concerns in Ireland and Greece, and a breakdown in budget talks in Portugal highlighted problems facing periphery euro zone countries.

Frank at SG said that support for the euro despite sovereign debt issues illustrated the resilience of the single currency, and that he expected it to rise back above $1.40 in the near term.

Lingering uncertainty about how the Fed will announce more QE has increased market volatility, with one-week implied volatility for euro/dollar EURSWO= jumping to 15.9 percent on Thursday from 12.6 percent at the start of the week.

Against the yen, the dollar JPY= fell half a percent to the day's trough of 81.23. The Japanese currency showed little reaction to a Bank of Japan decision to keep interest rates virtually at zero while holding off from new policy initiatives.

The dollar is holding above a 15-year low of 80.41 yen hit earlier this week, but investors remain vigilant for any yen-weakening intervention after authorities entered the market last month.

The New Zealand dollar NZD=D4 rose 0.5 percent, brushing off a Reserve Bank of New Zealand decision to hold rates steady at 3 percent as investors took comfort from the central bank's remarks that rates would still head higher at some point [ID:nWEL004196] [ID:nSGE69Q0P6].

(Editing by John Stonestreet)

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