FOREX-Dollar slips as China rate hike impact ebbs

* Dollar takes breather after surging on China rate rise

* Euro has major support near $1.3580

* Sterling awaits spending cut review, BoE minutes

(Updates prices; changes byline, dateline; previous TOKYO)

By Anirban Nag

LONDON, Oct 20 (BestGrowthStock) – The dollar eased against a basket
of currencies for the first time in four sessions on Wednesday,
as appetite for higher-yielding currencies stabilised after
being jolted by a surprise interest rate hike by China.

The dollar index (Read more about the global trade. ) dipped 0.5 percent to 77.798 (.DXY: ) (=USD: )
after climbing more than 1.6 percent the previous day, but was
likely to stay supported in the near term due to the potential
for further short-covering by investors.

“The dollar’s move down through September went too far and
was overdone. This bounce we saw is part of a healthy
correction,” said Jane Foley, senior currency strategist at
Rabobank.

“The dollar’s weakening trend remains in intact as China’s
rate hike will not be slowing down its economy significantly and
this is just a temporary pause in ‘risk-on’ trades.”

The U.S. currency is often seen as a safe-haven currency and
gains when appetite for riskier assets or growth-linked
currencies suffers.

Investors had increased their bets against the dollar in
recent weeks and had gone long on currencies like the euro and
the Australian dollar on heightened expectations the Federal
Reserve will unveil a second round of quantitative easing.

Those stretched positions had increased chances of a
short-covering bounce in the dollar.

Some analysts say the market’s reaction to the previous day
move by China was overblown, and with the Federal Reserve set to
ease monetary policy further next month any dollar rebound would
be short-lived.

“Yesterday’s exaggerated impact on the dollar simply shows
that the market had become too entrenched in its QE-led dollar
bearishness,” Daragh Maher, deputy head of global foreign
exchange research at CIB wrote in a note.

“The Chinese hike has provoked a considerable sell-off (in
the euro). The dollar’s relief has been sufficiently pronounced
to change the technical complexion.”

Charts indicate the dollar index (Read more about the global trade. )’s breach of resistance near
77.93, its Oct. 12 high, and through 77.894, a 23.6 percent
retracement of its August-October slide, could pave the way for
a move to the 78.96-98 area, which would be a 38.2 percent
retracement of that August-October drop.

ON TRACK FOR QE

Several Federal Reserve officials indicated on Tuesday that
the central bank will soon offer further monetary stimulus, with
one saying $100 billion a month in bond buying may be
appropriate. [ID:nN19258951].

The euro was flat at $1.3817 (EUR=: ), steadying from its 1.6
percent slide the previous day. It had fallen sharply as
investors trimmed some of their risk-taking positions after
China raised interest rates by 25 basis points in its first
tightening in nearly three years.

The move spurred concerns that it could mark the start of a
more aggressive phase of monetary tightening, dampening Chinese
and global growth and denting China’s voracious demand for
commodities. [ID:nSGE69I0HU]

Traders had fretted the yen could strengthen broadly if
Chinese and Asian shares were to fall sharply, but as it turned
out Chinese shares rose (.SSEC: ) after having fallen initially.

As a result, the euro was up 0.2 percent against the yen at
112.23 yen (EURJPY=R: ), though the dollar dipped 0.3 percent to
81.38 (JPY=: ), not far from its 15-year low of 80.88 yen.

The commodity-sensitive Australian dollar rose 0.93 percent
to $0.9782 (AUD=D4: ) regaining some ground after sliding more
than 2 percent on Tuesday.

Sterling (GBP=D4: ) was up 0.2 percent $1.5745 ahead of the
release of the minutes from the Bank of England’s last monetary
policy meeting and a spending cuts programme from the coalition
government.

The BoE minutes are expected to show a three-way split in
voting, with policymaker Adam Posen seen voting for more QE
while Andrew Sentance is expected to have again voted for a rate
increase.

(Additional reporting by Masayuki Kitano in Tokyo)

(Editing by John Stonestreet)

FOREX-Dollar slips as China rate hike impact ebbs