FOREX-Dollar index rises off 10-mth low as bets trimmed

* Short-covering, profit-taking help lift dollar

* Rise in longer-term US bond yields may support dlr-trader

* IMM speculators’ bets vs dollar off peak but still large

By Masayuki Kitano

TOKYO, Oct 18 (BestGrowthStock) – The dollar rose against a basket of
currencies on Monday and pulled away from a 10-month low, with
market players saying the short-covering bounce may have more
room to run given the recent build-up of bets against the dollar.

The greenback extended a rebound that started late last week,
with the euro retreating further from an eight-month high and the
Australian dollar backing off from Friday’s peak above parity
that was the highest since it was floated in 1983.

Investors had increased their bets against the dollar in
recent weeks on heightened market expectations for the U.S.
Federal Reserve to unveil a second round of quantitative easing
as early as November. That positioning had pointed to the risk of
a short-covering bounce in the dollar.

“I think everyone was just looking for some kind of trigger.
The only question had been one of timing,” said Tsutomu Soma,
senior manager for Okasan Securities’ foreign securities
department.

Market players were likely trimming back their bets against
the dollar ahead of a forthcoming G20 meeting and before hedge
funds’ book closings at the end of November, Soma said.

The dollar index (Read more about the global trade. ) rose 0.5 percent to 77.402 (.DXY: ), having
hit a 10-month trough of 76.144 on Friday.

The euro shed 0.7 percent to $1.3881 (EUR=: ), pulling away
from its highest in more than eight months of $1.4161 hit on
trading platform EBS on Friday.

The latest data from the U.S. Commodity Futures Trading
Commission showed that speculators trimmed bets against the
dollar in the latest week but still had hefty bets against the
U.S. currency. [IMM/FX]

The value of the dollar’s net short position slipped to $29
billion in the week ended Oct. 12, down from a net short of $30.5
billion in the previous week, the biggest bet against the dollar
since at least June 2008.

“Expectations of QE2 are fully priced in for November or
December. Questions remain exactly on the extent of that QE2,”
said Sue Trinh, senior currency strategist at Royal Bank of
Canada in Hong Kong.

“Overall, with the downside and the bad news pretty much
fully factored in for the U.S. dollar, the risk is towards more
of a dollar squeeze, especially given how skewed positioning is
ultimately,” Trinh added.

DOLLAR AND TREASURY YIELDS

The Australian dollar fell 0.6 percent to $0.9847 (AUD=D4: ).
The Aussie rose to $1.0004 on Friday, climbing above parity for
the first time since it was floated in 1983.

A senior trader for a major Japanese bank 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.

The dollar’s moves have recently been highly correlated with
10-year Treasury yields (US10YT=RR: ).

For example, the 90-day correlation between the 10-year
Treasury yield and the dollar index (Read more about the global trade. ) is now at 0.77, near a peak
hit earlier in October that was the highest since April 2009.

“I think there is a good chance that we may see a pull-back
in European currencies and the Australian dollar,” said the
senior trader for a major Japanese bank.

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, and the U.S. yield curve steepened
as investors bet the Fed would be successful in generating more
inflation. [ID:nN15187998]

MACD, a technical indicator used to gauge short-term trading
momentum, is now flashing a sell signal for both the euro and the
Australian dollar, pointing to the potential for a further
pull-back in those currencies.

The dollar dipped 0.1 percent against the yen to 81.36 yen
(JPY=: ), edging back toward a 15-year low of 80.88 yen hit on EBS
last week.

The senior trader for a major Japanese bank said that, while
the potential for yen-selling intervention remained, he harboured
doubts about just how strongly the Japanese authorities may feel
a need to do so, given that the yen’s recent rise could be blamed
on broad dollar weakness.

Some market players have also speculated that Tokyo may
prefer to avoid intervention ahead of a Group of 20 finance
ministers’ meeting in South Korea from Oct. 22.
(Editing by Joseph Radford)
(Additional reporting by Charlotte Cooper in Tokyo, Wayne Cole
in Wellington;)

FOREX-Dollar index rises off 10-mth low as bets trimmed