FOREX-US dollar slides ahead of Fed, election results

* Aussie hits parity vs US dollar for 2nd time since 1983

* U.S. dollar suffers a day before Fed policy decision

* Investors await results of U.S. midterm elections
(Adds details, updates prices)

By Wanfeng Zhou

NEW YORK, Nov 2 (BestGrowthStock) – The U.S. dollar fell on Tuesday
after Australia’s surprising interest rate hike and positive
economic news in the euro zone, but analysts warned of a
possible rebound if the Federal Reserve disappoints markets at
the end of its policy meeting on Wednesday.

Investors also awaited the results of U.S. mid-term
elections on Tuesday. Some analysts said a Republican victory
could be positive for the U.S. currency on market hopes for
increased fiscal austerity and less government regulation.

But most investors have looked beyond the elections and
focused instead on a two-day meeting of the U.S. central bank’s
Federal Open Market Committee, which looks set to announce a
second round of monetary easing on Wednesday. For details, see
[ID:nN01141530]

Expectations have centered around an initial commitment
from the Fed to buy at least $500 billion in Treasuries over
five months, which was less than the $1 trillion size some
traders had initially estimated. However, much uncertainty
surrounds the scope and pace of the purchases.

“There’s every chance of a rebound in the dollar as I think
its weakness has been directly correlated to fear the Fed was
going to do something of shock-and-awe nature,” said Alan
Wilde, head of fixed-income and currency at Baring Asset
Management in London. Baring oversees $50 billion in assets.

Analysts said the risk of a dollar recovery is building
after the greenback has lost about 8 percent against a basket
of major currencies since the start of September on
expectations the Fed will purchase more assets, a move that
would pressure U.S. yields and diminish the return on
dollar-denominated investments.

The U.S. Dollar Index (.DXY: ), which tracks the greenback
against a basket of six currencies, hit a two-week low of
76.636 and was last down 0.7 percent at 76.724.

The euro (EUR=: ) traded as high as $1.4058 on trading
platform EBS, buoyed by a pick-up in euro zone manufacturers’
output. [ID:nLDE6A10TX] It was last up 1.1 percent at $1.4038.

Traders said hourly momentum in euro/dollar is bullish, but
very overbought, suggesting $1.4045/$1.4080 resistance will
likely hold in the near term. Renewed worries about euro zone’s
sovereign debt issues could also limit the euro currency’s
upside.

Also on Tuesday, the Australian dollar hit a peak of
US$1.0025 (AUD=D4: ), the highest since the currency was floated
in 1983. The Reserve Bank of Australia raised its cash rate by
25 basis points to 4.75 percent as a preemptive strike against
inflation.

The dollar rose 0.3 percent to 80.68 yen (JPY=: ), not far
from the record low of 79.75 set in 1995.

MORE CONDITIONAL

Aroop Chatterjee, currency strategist at Barclays Capital
in New York, said the dollar’s reaction will depend not just on
the size of asset purchases, but also on the commitment of
policymakers to make the asset purchases.

“If the level of commitment is more conditional than what
the market expected, that would disappoint,” he said, adding:
“U.S. data has been quite strong of late.”

In the event of a dollar rebound, Chatterjee expects to see
“bigger” gains against the euro, which has been “primarily
driven by the negative dollar sentiment, rather than euro
positive news.”

Chatterjee sees euro/dollar at $1.35 in six months and
$1.30 in 12 months.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Multimedia report on run-up to the Fed meeting:
http://link.reuters.com/pyb23q
Top News-U.S. elections: http://link.reuters.com/fyq86p
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Steven Englander, Citigroup’s head of G10 FX strategy in
New York, said another uncertainty surrounding the Fed’s
program is “what the trade-off between dissents and QE2
commitments is.”

No dissent, he said, even with a lower-than-expected
initial commitment, will likely eventually be seen as U.S.
dollar negative as it suggests “an agreement in principle with
respect to the need for QE2 and debate over the size.”

In contrast, Englander said two dissents at a moderate
headline quantitative easing level will be a positive for the
dollar as it would suggest that “there is much more internal
opposition to QE2 than the market anticipated.”

FOREX-US dollar slides ahead of Fed, election results