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Sun 28 Aug 2011 08:56 AM

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Dollar tumbles after Fed move; eyes US jobs data

Doubts about US economy, euro zone debt crisis ups demand for Swiss franc, Japanese yen

Dollar tumbles after Fed move; eyes US jobs data
Failure to hint at another round of quantitative easing, or QE, boosted the dollar initially (Getty Images)

The dollar fell on Friday after Federal Reserve Chairman Ben Bernanke stopped short of detailing further action to spur a flagging economy, though further losses could be limited ahead of a key US jobs report.

Recent weak data has fueled concern the United States is in danger of slipping back into a recession and investors will look to next week's data on personal spending, manufacturing and the labor market for clues about the health of the economy.

That should keep investors cautious about taking on risk and provide some sort of support for the safe-haven dollar. An expected drop in liquidity, due to a bank holiday in London on Monday and a hurricane that could affect parts of the US East Coast over the weekend is also likely to limit risk-taking.

"On balance, you are not going to see an unbridled risk on mode," said Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston. "I don't see too much dollar downside from here.

"If you do see a renewed worsening or below-consensus outcome on the jobs report, you could see a resumption of risk aversion because it's all about concerns that the US policymakers are not doing enough to rekindle growth."

Bernanke, speaking in Jackson Hole, Wyoming on Friday, said the Fed had marked down its outlook for the US economy and that the Fed would extend its September meeting to two days from one to consider its options.

However, he also said the onus for boosting long-term growth prospects lay at the feet of the White House and the U.S. Congress.

The Labour Department is slated to release August US jobs data on Friday. Economists polled by Reuters are looking for an increase of 80,000 jobs, with unemployment steady at 9.1 percent.

"Although it may be early to look for much impact from uncertainty created by the debt ceiling debate and financial market volatility, layoffs by cash strapped governments should continue to exact a toll," said Peter Buchanan, economist at CIBC World Markets in Toronto.

On Friday, the euro was last up 0.8 percent at $1.4495, near a session peak of $1.4502 set on trading platform EBS. Traders said the euro would struggle to hold above $1.45 and sell orders were said to be layered between $1.4460 and $1.4500.

Failure to hint at another round of quantitative easing, or QE, boosted the dollar initially. Under QE, the Fed prints money to buy bonds, which depresses Treasury yields and encourages investors to seek higher returns elsewhere. An increase in the money supply erodes the value of the dollar. But those gains quickly faded.

The dollar fell 1 percent to 76.66 yen.

On the week, the euro rose 0.8 percent against the dollar, while the dollar slipped 0.2 percent versus the yen.

Data from the Commodity Futures Trading Commission on Friday showed speculators boosted the value of the dollar's net short position to $16.27bn in the week ended August 23.

The Swiss franc tumbled to one-month lows versus both the dollar and euro after Swiss bank UBS said it may charge fees on some franc deposits, in a bid to discourage them from using the accounts to hoard safe-haven Swiss francs.

The dollar rose 1.7 percent to 0.8064 Swiss franc, while the euro gained 2.5 percent to 1.1689 francs. On the week, the dollar jumped 2 percent versus the franc and the euro gained 2.9 percent.

Worries about the US economy and the euro zone debt crisis have boosted demand for the Swiss franc and Japanese yen in recent months, prompting efforts by authorities in both countries to weaken their currencies.

"The underlying pressure for appreciation is there, but you are not going to see too much further appreciation in these currencies because their policymakers have repeatedly expressed their concerns," BNY Mellon's Shankar said. "That has introduced an element of two-way risk."

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