(Reuters) - The dollar was broadly weaker on Tuesday, falling to a one-month low against the euro in thin trading, as investors continued to scale back bullish bets on the greenback on the view that the Federal Reserve could reduce its asset-buying program later than expected.
Fed Chairman Ben Bernanke told
lawmakers last week the U.S. central bank still expects to start reducing its
massive bond purchase program later this year, but he left open the option of
changing that plan if the economic outlook shifted.
"In the absence of
any economic news, positioning has been driving the FX market," said Brian
Dangerfield, currency strategist at RBS Securities in Stamford, Connecticut.
"The market is still quite long dollars and in quiet periods like today,
traders are scaling back their positions especially in the wake of what Bernanke
said last week."
Investors had accumulated dollars the last few months
as Bernanke suggested in May that the Fed could start winding down its stimulus
plan later this year. A reduction in the Fed's bond purchases would be positive
for the greenback because it means that the U.S. central bank won't be flooding
the market with dollars as much.
The euro rose to $1.3238, its highest
level since June 21, as some investors pushed it to the 50 percent Fibonacci
retracement of the move from the early April low to the mid-June high. It was
last at $1.3225, up 0.3 percent on the day, rising for a third straight day.
Investors are looking to the flash Purchasing Managers' Index data on
Wednesday as worries about euro zone economies are re-emerging. Analysts said
there would probably be selling into any rebounds in the euro.
"is more of a technical move in an otherwise very thin market amid generally
soft data and questions on the timing of tapering," said Omer Esiner, chief
market analyst at Commonwealth Foreign Exchange in Washington.
Bernanke's dovish remarks have emphasized that the U.S. central bank's
bond buying will continue in some form and interest rates are likely to remain
low for the foreseeable future.
Benchmark yields have fallen as other
top Fed officials have stressed that the timing of any reduction in the central
bank's $85 billion monthly asset purchases would depend on economic data.
As a result, along with some weaker-than-expected U.S. data, the dollar
has sold off to key support levels. Further downside will require another round
of bad data, analysts said.
"The market is getting comfortable with the
idea that tapering is not tightening," said Sean Cotton, vice president and
foreign exchange advisor at Bank of the West in San Ramon, California.
The dollar index was last down 0.3 percent at 81.983. It fell to 81.926,
also its weakest since June 21.
Analysts, however, said the dollar would
likely strengthen in the coming months against currencies such as the euro,
sterling and the yen because the Fed is expected to be the first major central
bank to make its policy less accommodative.
But few anticipate the
dollar's rise to be smooth.
Benchmark U.S. 10-year Treasury yields,
which have had a robust correlation with the dollar index, have slipped in
recent weeks. They last stood at 2.507 percent, slightly up on the day but well
below the 2.755 percent hit on July 8, their highest since August 2011.
The dollar was down 0.2 percent against the yen at 99.43 yen, recovering
from a one-week low of 99.13 yen earlier.
Analysts said Japanese Prime
Minister Shinzo Abe's decisive upper house election win last weekend would pave
the way for pro-growth fiscal policies and for further Bank of Japan monetary
easing, which would weaken the yen.
The dollar was up more than 15
percent versus the yen this year, and the recent slide in dollar/yen has likely
bottomed out, according to trends in the options market.
the beginning of holidays has reduced volumes and volatility, which could result
in most currencies trading in ranges. Some $3.99 billion in euros had changed
hands, according to Reuters Dealing data on Tuesday, and $2.06 billion in yen