FOREX-Dlr index off lows on doubts how far Fed will ease

* Short-covering lifts dollar index (Read more about the global trade. ) from 10-mth lows

* Euro, Aussie fall against U.S. dollar

* Uncertainty whether QE2 has been fully priced in

(Updates prices; adds quote and graphics)

By Anirban Nag

LONDON, Oct 18 (BestGrowthStock) – The U.S. dollar bounced from a
10-month low against a basket of currencies on Monday, as
investors uncertain how much monetary easing the Federal Reserve
will resort to trimmed bearish bets against the greenback.

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 (AUD=D4: ) backing off from Friday’s peak above
parity, the currency’s highest since it was floated in 1983.

Traders said short-term speculative, model accounts and
Asian central banks were active in the session as the euro fell (Read more about the trembling euro. )
to as low as $1.3830. Next downside targets are channel support
at $1.3825 and then the Oct. 12 low of $1.3775.

The dollar index (Read more about the global trade. ) (=USD: ) (.DXY: ), which rose 0.5 percent to
77.41, was seen as needing a 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 shed 0.6 percent on the day to $1.3886 (EUR=: ),
pulling away from a more-than eight month high of $1.4161, hit
on trading platform EBS on Friday.

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].
Still, with unemployment proving sticky, the Fed is expected to
offer more support to the economy.

“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 (US10YT=RR: ). A senior trader for a major
Japanese bank in Tokyo said the dollar could draw support in the
near-term if longer-term U.S. Treasury yields continue to rise
after climbing late last week.

Yet, the dollar ceded ground against the yen, falling 0.37
percent to 81.13 yen (JPY=: ) and edging back towards a 15-year
low of 80.88 yen hit on EBS last week.

Foley at Rabobank said despite the dollar/yen move, “there
is talk that the Japanese will not intervene ahead of the G20
meeting.” The Group of 20 finance ministers’ meeting starts in
South Korea from Oct. 22.

The Australian dollar fell 0.6 percent to $0.9846 (AUD=D4: ),
continuing its pull back from parity. The Aussie rose to $1.0004
on Friday, but slid to $0.9801 on Monday after some macro funds
sold, with traders citing decent stop-loss orders at $0.9780.
(Editing by Catherine Evans)

FOREX-Dlr index off lows on doubts how far Fed will ease