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Tuesday October 24, 2006 - 20:12:12 GMT
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FOREX-Dollar falls as yen recovers, dealers await Fed

FOREX-Dollar falls as yen recovers, dealers await Fed
Tue Oct 24, 2006 3:50pm ET169

(Updates with fresh comment, prices, changes byline)

By Amanda Cooper

NEW YORK, Oct 24 (Reuters) - The dollar fell slightly on Tuesday, surrendering some of Monday's gains, as this week's rise in U.S. bond yields stalled ahead of the statement due on Wednesday after the Federal Reserve's policy meeting.

The dollar has been erratically climbing in the past couple of months as data showed the U.S. economy to be stronger than thought in the summer, and as yields on U.S. debt began to climb again in recent weeks as Federal Reserve speakers reiterated their concern about inflation.

No change is expected though to the fed funds rate of 5.25 percent after the Federal Reserve's policy meeting on Wednesday.

Earlier on Wednesday though the mixture of the yen's break higher and a weak U.S. regional manufacturing survey from the Richmond Federal Reserve prompted dealers to take profits on any earlier bets in the dollar's favor. See [nWBT006113] for details on the survey.

"What we're going to look for tomorrow is whether we get a few hawks in the Federal Reserve dissenting like (Richmond Fed President Jeffrey) Lacker ... and then see if they make any modification to the language in the statement," said Andrew Busch, global foreign exchange strategist for BMO Capital Markets in Chicago.

"So that's pretty much what it is right now, we're just sloshing around a little bit," he said.

By mid-afternoon in New York, the euro was last up 0.2 percent at $1.2573, having touched an intra-day low of $1.2527, where sovereign buyers reportedly established a floor for the currency.

The dollar was also down against the yen , which had come under pressure earlier in the day after Japan's top financial diplomat, Hiroshi Watanabe, indicated on Monday that he was not too concerned with the currency's level.

But the breach of short-term technical levels unleashed a wave of dollar selling against the yen that quickly spread to other currencies.

"Once we went below 119.40, that was the hourly-trendline from the lows of 118.40 and that was the trigger. Once we went through 119.40, that signaled the end of the dollar's move higher," said Brian Dolan, director of FX research at in Bedminster, NJ.

The dollar was las down 0.1 percent against the yen at 119.18 yen.

Tuesday's moves came amid market anticipation the Fed would re-emphasize its concern about inflationary pressures in the statement accompanying its rate decision on Wednesday.

With this in mind, players in the interest rate futures markets have begun pricing in the possibility of a Federal Reserve rate rise by early next year and that has generally supported the dollar.

Federal funds futures contracts now imply a 10 percent chance the Fed will raise rates in December, up from 8 percent on Monday.

Looking ahead to January, fed futures on Tuesday implied an 18 percent chance of an increase, up from 14 percent in the previous session.

"I think the bias is for a slightly stronger anti-inflation rhetoric," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

"But the market is still waiting for the big moves, and we haven't seen the dollar break out of its ranges," he added.

Sterling got a boost from a Bank of England official who said policy makers should take no chances with inflation, which further cemented expectations for the British central bank to raise rates when it meets next month.

Sterling was last up 0.1 percent at $1.8757. Against the Swiss franc, the dollar shed 0.1 percent to reach 1.2651 francs .

The Swiss franc was also modestly supported by comments from Swiss National Bank Chairman Jean-Pierre Roth who said economic fundamentals and low inflation still support the currency despite its recent weakness.

(Additional reporting by Gertrude Chavez-Dreyfuss)

© Reuters 2006. All Rights Reserved.


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