SYDNEY (Reuters) - The dollar held off a seven-month trough in Asia on Monday, having found a bit of support after a top Federal Reserve official suggested there is a chance the central bank may scale back stimulus next month.
The euro, meanwhile, failed to gain much momentum after a general election in Germany left Angela Merkel’s conservatives just short of votes needed to rule on their own.
The euro rose around a quarter of a U.S. cent to an early high of $1.3555 before quickly reversing to $1.3528, flat from late New York levels. Against the yen, the common currency was also steady at 134.40, having earlier touched 134.56.
That left the dollar index .DXY little changed at 80.420, not far from a seven-month trough of 80.060 plumbed last week.
The dollar has fallen more than 2 percent in the past two weeks, firstly as markets scaled back expectations for any aggressive pullback from the Fed and after it shocked many by maintaining its massive stimulus.
Comments from Fed officials last Friday left investors still unsure of when the tapering will begin, but St. Louis Fed chief James Bullard kept the door open for an October move, saying it was possible if inflation and unemployment data warranted it.
“Fresh from wrong footing most with the no-move on tapering, Friday saw comments by James Bullard put the market back on guard,” strategists at Nomura wrote in a client note.
“Bullard said it was a close decision not to taper and that the $10 billion was not ‘far off’ from the action they ultimately took.”
Other Fed officials including Dennis Lockhart, William Dudley and Richard Fisher are due to speak later on Monday. Dudley is head of the powerful New York Fed and a permanent voter, so his words carry weight in markets.
One of the notable movers was the Australian dollar, which has just about reversed all of its post-Fed gains. The Aussie traded at $0.9378, having fallen from last week’s high of $0.9530.
Traders said one reason for the pullback in the Aussie was increased speculation the Reserve Bank of Australia (RBA) will be forced to cut interest rates in order to keep a cap on the currency.
Indeed, last week’s rally in the Aussie saw markets price back in the risk of a rate cut, with interbank futures implying around a 40 percent probability of a move by year end.
The Aussie’s immediate fortunes hinge on the HSBC’s report on China’s manufacturing sector due around 0145 GMT. China is Australia’s biggest export market.
Further evidence that the world’s second biggest economy has indeed pulled out of a slide should be positive for the Aussie, which is often used as a liquid proxy for China plays.
Editing by Shri Navaratnam