FOREX-Dollar slides, short-covering rally pauses

* Lower U.S. Treasury yields narrow spreads

* U.S. currency pauses from recent short-covering rally

* Investors batten down for next week’s Fed meet

(Adds comment, updates throughout; previous TOKYO)

LONDON, Oct 28 (BestGrowthStock) – The dollar slipped on Thursday,
relinquishing some of the gains made earlier this week as U.S.
Treasury yields pulled back from a recent rise as investors
continued to recalibrate expectations for U.S. monetary easing.

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

Lower U.S. government bond yields on Thursday narrowed the
spread between the 10-year euro zone and U.S. benchmarks,
putting the brakes on a widening seen in the past week which had
helped to prompt a short-covering rally in the greenback.

Analysts said rate differentials have been a big driver of
the dollar’s move this week, as investors batten down ahead of
the Fed’s policy meeting on Nov. 2-3.

“Interest rate differentials had stopped moving against the
dollar, but today the dollar is giving up a bit of those gains,”
said Marcus Hettinger, global currency strategist at Credit
Suisse in Zurich.

“We’re seeing some consolidation in the dollar before the
Fed meeting as no one knows how much QE the Fed might do.”

The dollar’s fate has been closely correlated with U.S.
yields and their gap with rates on other currencies, as
increases in U.S. yields — other things being equal — tend to
help the greenback by making dollar investments more attractive.

A widening in some U.S. yield spreads against other
currencies had been driven by rising Treasury yields as
speculation the Fed may buy more assets to stimulate the economy
has turned into a guessing game of how much they may purchase.

By 0752 GMT, the euro (EUR=: ) had risen 0.4 percent on the
day to $1.3815, having climbed to a session high around $1.3850
in early European trade. This helped to push the dollar (.DXY: )
0.4 percent lower versus a currency basket.

The euro held above a one-week low around $1.3730 hit on
Wednesday, and many analysts say the continuing gap between euro
zone and U.S. two-year yields means the euro is unlikely to fall
below $1.35 in the coming months.

“(The) Fed will confirm that medium-term deflation risks
still justify easing, and with 10-year rates now above Jackson
Hole levels, the resulting rally in bonds should soften the
dollar again,” JPMorgan analyst Justin Kariya said in a note.

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]

DOLLAR/YEN SLIDES

The dollar (JPY=: ) fell half a percent to the day’s trough of
81.23 yen. The Japanese currency showed little reaction to the
Bank of Japan’s decision to hold interest rates virtually at
zero while holding off from new policy initiatives on Thursday.

Japan’s central bank also said it would bring forward its
next policy meeting to Nov. 4-5 from Nov. 15-16. [ID:nTKG006926]
[ID:nTKZ006609]

The dollar faces strong resistance at 82 yen, which has
blocked its advance several times in recent weeks. Its 21-day
moving average was also at 82 yen on Thursday.

Except for a short period after Japan intervened in currency
markets on Sept. 15, the dollar has been mostly stuck below the
21-day average line since its decline in June, and a rise above
82 yen could ignite more buybacks in the dollar.

The New Zealand dollar (NZD=D4: ) rose 0.5 percent, brushing
aside 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].

(Additional reporting by Tokyo Forex Team; Editing by John
Stonestreet)

FOREX-Dollar slides, short-covering rally pauses