NEW YORK The U.S. dollar hovered near a four-week low against a basket of major currencies on Monday after former Treasury Secretary Lawrence Summers withdrew his name as a candidate to lead the Federal Reserve.
Summers is perceived by markets as relatively hawkish and his withdrawal suggests there will be a more gradual approach to tightening monetary policy. More so as his decision could leave Janet Yellen, a well-known policy dove, as front runner for the top job. President Barrack Obama accepted Summers' withdrawal.
The dollar index .DXY fell 0.4 percent to 81.103, not far from the intraday trough of 81.029, its lowest since August 21.
"A change in the leadership at the Federal Reserve necessarily generates a degree of uncertainty about the future course of monetary policy," said Jens Nordvig, global head of currency strategy at Nomura bank in New York. "Of all the various options, Yellen implies the greatest degree of continuity, and hence the least amount of uncertainty."
The announcement sparked a rise in risk tolerance with even emerging market currencies getting a bid against the dollar.
But analysts cautioned the impact could be short-lived and that it would be tough to see the dollar move much lower ahead of the Fed meeting on September 17-18.
Against the yen, the dollar was down 0.5 percent at 98.84 yen, close to the day's low of 98.53 yen which was the lowest since September 6, using Reuters data.
The euro was up 0.5 percent at 1.3357, having jumped to a near three-week high around $1.3382 earlier. Strategists said the pair could now target the August 20 high.
The South African rand was the best performing of the 36 most actively traded currencies against the dollar with a 2.2 percent advance on Monday.
The news of Summers' dropping out of the race also capped U.S. 10-year Treasury yields, which touched its lowest since August 30 and was a way off the 3.007 pct on September 6, which was a more than two-year high. The 10-year yield was last ata 2.809 percent.
The dollar was already under pressure on recent disappointing economic data and as markets braced for the Fed to scale back its massive $85 billion monthly bond-buying stimulus by a modest $10 billion this week.
"The expectation, and hope, is for a dovish outcome," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
Risky assets could take a hit if the Fed were to taper its stimulus by a larger than expected amount, such as by $20 billion or more, Okagawa added.
If the Fed trimmed by a larger-than-expected $15 billion, the dollar could get an initial knee-jerk boost, but the central bank might have a firm forward guidance message which could drag the dollar lower according to Adam Myers, senior FX strategist at Credit Agricole in London
"Markets haven't yet focused on the stronger forward guidance language that could accompany the tapering announcement... for example reinforcing that the Fed funds rate is not going to go up all through 2014 and perhaps 2015... that will be the more dominant factor and pull the dollar lower."
(Reporting By Nick Olivari; Editing by Kenneth Barry)
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