Categorized | Forex

FOREX-Dollar near 4-mth lows after Moody’s U.S. warning

FOREX-Dollar near 4-mth lows after Moody’s U.S. warning

* Dollar index sits just above critical retracement support

* Charts indicate dollar could be oversold

* Euro may gain further if German court oks rescue fund

* Dutch election also eyed, though seen unlikely to surprise

* Dollar/yen breaks out of range, hits 3-1/2 month low

By Hideyuki Sano

TOKYO, Sept 12 (Reuters) – The U.S. dollar hovered near four-month lows against a basket of major currencies on Wednesday after Moody’s warned it could cut the credit rating of the United States and on expectations of more stimulus measures from the U.S. Federal Reserve.

The euro was on hold after having rallied to four-month high against the dollar on Tuesday, though it could gain further if Germany’s Constitutional Court approves the country’s participation in the euro zone’s bailout fund. The ruling is due at 0800 GMT.

The dollar index fell to 79.794 on Tuesday, extending its fall after Moody’s said the United States could lose its triple-A debt rating if next year’s government budget talks do not produce policies that gradually cut the country’s debt. The index last stood at 79.87.

“Although everyone has been aware of the potential risks in the U.S. fiscal situation, a warning at this time was a bit of surprise and triggered fresh selling,” said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

John Boehner, the top Republican in the U.S. Congress, said he had no confidence a divided Washington could avoid a “fiscal cliff” that threatens to push the nation into a recession.

Expectations that the Fed may embark on further stimulus measures at its policy meeting ending on Thursday are likely to keep the dollar under pressure for now.

“I feel that the market is getting a bit too excited about the chance of QE. Still those who have bought the dollar and sold the euro are now getting nervous ahead of the Fed meeting and being forced to cut their positions,” said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank.

YEN NEAR DANGER ZONE?

The dollar index is testing an important support at 79.75, which is the 38.2 percent retracement of the rise from its 2011 low to two-year high hit in July. A break of that support would strengthen the case that its long-term uptrend since last year is over.

But the index might stage a rebound given some technical signals that it is oversold. Its 14-day relative strength index has fallen below 30, which suggests there is considerable chance of a corrective rebound in the near future.

Although chances are slim that Germany’s top court will signal that Germany must change its constitution or hold a referendum before it can take part in any further integration of the European Union, such a ruling would drive the dollar higher.

The euro stood at $1.2862, near a four-month high of $1.2872 hit on Tuesday.

Another potential source of disruption for the euro is a general election in the Netherlands on Thursday, though latest polls indicate radical anti-euro parties have lost the momentum they had just a month ago.

But given that two mainstream parties are too small to win outright majority, coalition talk is likely to take some time, making the election less likely to be a market moving event, said Junya Tanase, chief FX strategist at JPMorgan, noting it took four months to form a government last time.

The Japanese yen held near 3-1/2 month high against a broadly weak U.S. dollar, trading at 77.86 yen per dollar , near Tuesday’s high of 77.70 per dollar.

On charts, the dollar now looks extremely bearish against the yen after having broken below its trading range in the past few months, market players said.

“We think the Fed will announce QE3 this week and that the dollar will continue to fall after the Fed meeting, possibly to around 77 yen within a few weeks,” said JPMorgan’s Tanase.

Curbing the yen’s gains are expectations that, should the Fed announce large scale monetary easing, the Bank of Japan is also likely to take additional easing measures next week, market players said.

Still, a fall below June 1 low of 77.652, the dollar’s next major support level, could open the way for a test of this year’s low around 76 yen, though wariness about Japan’s yen intervention would also grow as well at those levels.

The Canadian dollar also stood near one-year high hit on Tuesday. The Canadian unit traded at C$0.9730 per U.S. dollar , near Tuesday’s high of C$0.9713.

The Australian dollar recovered to three-week high of $1.0458, as weakness in the U.S. dollar overwhelmed the recent pessimism on the Aussie stemming from worries about slowdown in China, Australia’s biggest export market.

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