* Data calms U.S. rate hike expectations for now
* Major currencies seen hugging well-worn range
* Euro/dollar implied volatilities hit multi-month lows
* Canadian dollar just shy of near 3-year high
* Cross/yen implied volatilities return to pre-crisis levels
By Hideyuki Sano
TOKYO, Feb 17 (Reuters) - The dollar hit a one-week low
against a basket of currencies on Thursday, hurt by worries over
rising tensions in the Middle East and as subdued U.S. economic
data helped keep a rise in U.S. bond yields in check.
But traders were not overly bearish on the currency against
the backdrop of a generally improving U.S. economy and also as
the euro is seen susceptible to lingering worries over the euro
zone's debt problems.
The greenback fell on Wednesday after Israel's foreign
minister, a vociferously far-right partner in the conservative
coalition, said two Iranian warships planned to sail through the
Suez Canal en route to Syria, calling it a "provocation".
[]
The news rekindled worries that a regime change in Egypt
could make the entire region unstable, though financial markets
were not completely risk-averse with Wall Street shares hitting
new highs.
The market's knee-jerk reaction was to sell the dollar,
although it has tended to be bought at times of crisis in the
past.
"My feeling is the market is looking beyond the era where the
U.S. has been the world's policeman," said Teppei Ino, an analyst
at Bank of Tokyo-Mitsubishi UFJ, adding that the threat of
geopolitical crisis no longer automatically leads to dollar
buying.
Traders kept an eye on the Middle East as clashes are
reported in many countries including Bahrain, a regional hub for
banking and financial services and home to a major U.S. naval
base.
But many traders said ramifications from uprisings in the
Middle East on developed economies and their currencies were far
too complex at this point, leading many traders to expect the
dollar to stay in a well-worn range.
The dollar index <.DXY> fell as low as 78.048, its lowest in
a week, before recouping losses to stand at 78.201, little
changed from late Wednesday U.S. levels.
It was well above its three-month low of 76.881 hit earlier
this month -- a support few traders expect it to test in the near
future.
The euro held firm at $1.3572, after having risen 0.5 percent
on Wednesday, to $1.3588 <EUR=>, extending its recovery from a
three-week low of $1.3428 hit last week.
While persistent buying by sovereign players below $1.35 is
seen supporting the euro, the currency could face resistance
around $1.3630-45, where its 14- and 21-day averages lie as well
as a 50 percent retracement of its decline earlier this month.
As many traders expect the euro to be stuck in a familiar
range, implied volatilities on euro/dollar options fell to the
lowest level in many months.
One-month volatility fell to around 10.7 percent <EUR1MO=>,
its lowest level since September, from around 13 percent at the
start of this year.
Worries about the Middle East kept the safe-haven Swiss franc
near a one-week high against both the euro and the dollar.
The dollar fetched 0.9585 franc <CHF=>, having fallen as low
as 0.9554 franc on Wednesday, while the euro bought 1.3005 francs
<EURCHF=R>, near a one-week low of 1.2974 hit on Wednesday.
The dollar also ran out of steam against the yen after
hitting an eight-week peak of 83.98 yen on Wednesday. It fetched
83.58 yen. <JPY=>.
The U.S. currency also hovered just above a near three-year
low against the Canadian dollar. It traded at C$0.9841 <CAD=D4>,
just a hair above low of $0.9832 hit earlier this month.
Some market players are shifting funds to the Canadian dollar
from the Australian dollar, another commodity-linked currency, as
Canada is seen raising rates by June while Australian rates are
expected to stay on hold a bit longer.
The U.S. dollar also lacked fuel as U.S. bond yields have
shown signs of stabilising.
U.S. industrial output data fell short of market expectations
a day after retail sales data disappointed investors.
Minutes of the Federal Reserve's Jan. 25-26 policy meeting
suggested the bank remained unhappy with the job market's
recovery and the consensus was still firmly aligned with
completing the planned purchase of $600 billion in government
bonds. []
Although rising inflation around the globe has led some
investors to speculate there could be a rate hike by the Fed,
such expectations will likely prove to be premature, said Junya
Tanase, a strategist at J.P. Morgan Chase Bank.
"The risk of inflation varies from country to country. In the
United States inflation is still not an imminent risk and U.S.
interest rates are starting to tick down. That's capping the
dollar," Tanase said.
Still, U.S. CPI data due at 1330 GMT could change that
equation, particularly against the yen, if inflation proves
higher than economists' forecasts, some traders said.
Traders said the yen is increasingly viewed as under pressure
as Japan is seen likely to be the last country to raise interest
rates.
One sign of easing expectations of a rise in the yen is in the
options market, where implied volatilities on cross/yen pairs are
falling to levels last seen before the 2008 global financial
crisis.
Implied volatility on one-month Aussie/yen options
<AUDJPY1MO=> fell to 9.85/10.35% <AUDJPY1MO=>, less than a third
of their levels in May last year and the lowest level since 2007.
"Japanese investors often buy Aussie/yen puts to hedge their
Aussie/yen long positions. But I think now they feel they no
longer need to buy puts to protect the downside," said a trader
at a Japanese bank.
(Editing by Michael Watson)
