Dollar index slips, investors await guidance from Fed

[August 28, 2015]  By Anirban Nag

LONDON (Reuters) - The dollar eased against a basket of major currencies for the first time in four days on Friday, with investors awaiting fresh comment from the U.S. Federal Reserve on interest rates after a tumultuous week in global financial markets.

The dollar had bounced back from seven-month lows struck on Monday as a semblance of calm returned to markets, with the greenback also benefiting from upbeat U.S. data.

The dollar index was down 0.1 percent at 95.514, off a one-week high of 96.031 set on Thursday. Still, after diving to a seven-month trough of 92.621 on Monday when global stock markets went into a tailspin, the index has bounced more than 3 percent.

Against the yen, the greenback dipped below 121 yen, still a remarkable recovery from Monday's seven-month low of 116.15. The yen gave a muted reaction to data showing Japan's inflation slowed to zero percent, its weakest in two years.

The euro was trading 0.3 percent higher at $1.1280, but well off its lofty perch above $1.1700 reached on Monday when the sell-off in global markets and worries about a Chinese slowdown led investors to unwind euro-funded carry trades.
 

The market is keenly awaiting comments on policy normalization from Fed officials attending the Aug. 27-29 Jackson Hole Economic Symposium. Expectations for a September move have eased after a few Fed officials sounded a cautious note, citing the latest market turmoil and China's slowdown.

"We'd expect the general tone to be one of caution despite the evidence of U.S. economic strength," said Derek Halpenny, European head for global market research at Bank of Tokyo Mitsubishi.

"It might take some time to judge whether the events in China were an over-reaction or something more serious. Our internal valuation estimates indicate euro/dollar overshot on the upside and is now correcting back to levels consistent with traditional drivers of spot rates."

Data released on Thursday showed the U.S. economy grew faster than initially thought in the second quarter, an outcome that kept the chance of a U.S. interest rate hike this year on the table.

"Coupled with the stabilization in global risk appetite, the market now again entertains the idea of a potential Fed rate hike this year in December," said Petr Krpata, currency strategist at ING.

He said Friday's focus was on the August University of Michigan Confidence index after influential Fed policymaker William Dudley's reference to it earlier in the week.

In Europe, German inflation is set to remain low after data from the country's states, or Laender, indicated price pressures were pretty subdued.

That is likely to add to pressure on the European Central Bank to either increase its asset buying program or extend it beyond September 2016, a factor that is likely to weigh on the euro.

(Additional reporting by Hideyuki Sano in Tokyo; Editing by Gareth Jones)

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