* Short-covering lifts dollar index from 10-mth lows
* Euro, Aussie fall against U.S. dollar
* Uncertainty whether QE2 has been fully priced in
(Updates prices, adds detail)
By Anirban Nag
LONDON, Oct 18 (Reuters) - The dollar bounced from a
10-month low against a basket of currencies on Monday, as
investors trimmed bearish bets on the greenback on uncertainty
over how far the Federal Reserve will go in easing monetary
policy.
The dollar extended a rebound that started late last week,
with the euro retreating from an 8-1/2 month high and the
Australian dollar <AUD=D4> backing off from Friday's peak above
parity, the currency's highest since it was floated in 1983.
Traders said short-term speculation and model accounts and
Asian central banks were active in the session as the euro fell
as low as $1.3830. Next downside targets are technical support
at $1.3825 and then the Oct. 12 low of $1.3775.
The dollar index <=USD> <.DXY> was up 0.4 percent at 77.357,
after rising to 77.645 during morning trade. It was seen needing
to move above its Oct. 12 high of 77.93 to signal a short-term
bottom may be in place after Friday's 10-month trough of 76.144.
The index has lost nearly 5 percent in the past month as
investors increased their bets against the dollar on heightened
market expectations for the Federal Reserve to unveil a second
round of quantitative easing as early as November.
"The dollar's move down has been extremely aggressive and
there are investors wondering whether or not too much
quantitative easing has been priced in," said Jane Foley, senior
currency strategist at Rabobank.
"The dollar has been sold off in recent weeks but there are
plenty of opportunities to book profits. So I expect to see some
choppiness ahead of the next Fed meeting in November."
Market players were also trimming their bets against the
dollar ahead of a forthcoming G20 meeting and before hedge
funds' book closings at the end of November, analysts said.
The euro was down 0.6 percent on the day at $1.3894 <EUR=>,
pulling away from a more than eight month high of $1.4161, hit
on trading platform EBS on Friday. Traders said an option expiry
at $1.3900 could limit further price movements.
Data from the U.S. Commodity Futures Trading Commission
showed speculators trimmed bets against the dollar in the latest
week but still had hefty wagers against it. []
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"Graphics on net U.S. dollar long positions
http://r.reuters.com/kus26k
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QE PRICED IN?
Federal Reserve Chairman Ben Bernanke on Friday offered his
most explicit signal yet that the U.S. central bank was set to
ease monetary policy further. [].
Two more Fed officials joined in, arguing for further
aggressive action as U.S. inflation unexpectedly slowed in
September even as retail sales picked up. [].
"More and more Fed officials are signing up for QE and if
anything, this short squeeze in the dollar looks to be
temporary," said Neil Mellor, currency strategist at Bank of New
York Mellon. "The Fed is trying to bring about price stability
and generate some inflation in the economy by flooding the
market with more dollars. So the dollar is headed lower."
The dollar's moves have recently been highly correlated with
10-year Treasury yields <US10YT=RR>. A senior trader for a major
Japanese bank in Tokyo said the dollar could draw support in the
near term if longer-term U.S. Treasury yields continue to rise
after climbing late last week.
But the dollar ceded ground against the yen, falling 0.3
percent to 81.20 yen <JPY=> and edging back towards a 15-year
low of 80.88 yen hit on EBS last week. Traders reported
sovereign demand around the 81.15 level.
The Australian dollar fell 0.4 percent to $0.9857 <AUD=D4>,
continuing its pull back from parity. The Aussie rose to $1.0004
on Friday, but hit a low of $0.9801 on Monday after some macro
funds sold, with traders citing decent stop-loss orders at
$0.9780.
(Editing by Catherine Evans, John Stonestreet)
