* Dollar vulnerable before Fed decision
* Hits 3-month low versus higher-yielding Aussie dollar
* Many expect Fed to announce bond buying of $45 bln a month
* But dollar at 8-month peak versus yen on BOJ expectations
By Jessica Mortimer
LONDON, Dec 12 The dollar dropped to a
three-month low against the higher-yielding Australian dollar on
expectations of further monetary stimulus from the U.S. Federal
Reserve later on Wednesday.
But it hit an eight-month high against the yen on bets the
Bank of Japan will implement more aggressive monetary easing
after a likely victory of the Liberal Democratic Party in an
election on Sunday.
The Fed is expected to announce a fresh round of Treasury
bond purchases later on Wednesday, with many economists
forecasting it will opt for monthly purchases of $45 billion.
However, analysts said there was a risk policymakers may
decide to buy more than that, which would put the dollar under
broad selling pressure.
"People are selling the dollar on the possibility that the
Fed could do more easing than the market is expecting," said
Niels Christensen, currency strategist at Nordea in Copenhagen.
"If it is a neutral decision they could buy it back on the
fact. But if they do more, say above $50 billion, then the
dollar would be on the defensive."
Further dollar falls could see the euro test last week's
high of $1.3127, he said.
The euro was steady at $1.3002, well above a low of
$1.2876 reached last week, holding gains made after surprising
strength in German economic sentiment data on Tuesday.
Traders said the euro could extend gains if it rises above
reported stop loss buy orders around $1.3015-20.
"Although the view that the Fed will shift to outright
Treasury purchases is now very widely shared by market
participants, we do not believe it has been fully reflected into
markets or in positioning," said Vassili Serebriakov, a
strategist at BNP Paribas.
A fresh round of outright bond purchases is expected to
replace the Fed's expiring "Operation Twist" programme.
But the prospect of more monetary easing in Japan continued
to hurt the yen, with the dollar rising 0.55 percent to hit an
eight-month high of 82.94 yen, just shy of reported
options barriers at 83.00 yen.
"A lot of investors are looking for a break of 83.00 yen
ahead of the Japanese elections ... In the current environment
where investors are struggling to find trends in currency
markets people are keen to jump on the bandwagon with
dollar/yen," Nordea's Christensen said.
The euro was up 0.4 percent at 107.76 yen, near
last week's 7-1/2 month peak of 107.96 yen.
HUNGRY FOR YIELDS
The spectre of further easing in the United States is
putting renewed focus on higher-yielding currencies as the
world's four most liquid currencies -- the dollar, the euro, the
yen and the pound -- all have near zero interest rates now.
The higher-yielding Australian dollar rose as high
as $1.0542, its strongest since mid-September, stopping just shy
of a reported options barrier at $1.0550 and near-term
resistance around the Sept. 17 high of $1.0564.
"The Aussie remains one of a few currencies with yields
therefore investors have no choice but to buy," said a
Tokyo-based trader at a European bank.
The U.S. dollar also fell to an eight-week low against the
Canadian dollar of C$0.9856, while the New Zealand
dollar hit a nine-month high of $0.8407.
The dollar index stood at 80.068, little changed on
the day but down around 0.5 percent so far this week.
For now, it is holding above a 61.8 percent retracement of
its rally last week at 80.00, but a fall below that level could
open the way for a test of six-week low of 79.568 hit last week.