(Corrects first paragraph to reflect changes to Reuters data
showing dollar index closed marginally lower in New York on
Monday compared with Friday)
* Dollar takes breather after surging on China rate rise
* Dollar bounce seen short-lived
* Euro up, Aussie rebounds 1 percent
* Sterling drops after BoE minutes; spending review
By Anirban Nag
LONDON, Oct 20 (Reuters) - The dollar fell against a basket
of currencies on Wednesday, as appetite for higher-yielding
currencies revived after being jolted by a surprise interest
rate hike in China.
The dollar index eased 0.6 percent to 77.717 <.DXY> after
climbing more than 1.6 percent the previous day, staying well
above a 10-month low of 76.16 struck last week.
Analysts said the market's reaction to the previous day's
move by China was overblown, and with the U.S. Federal Reserve
expected to ease monetary policy further next month any dollar
rebound would be short-lived.
"I think the move itself indicated how excessive the
positioning in the market was, but any correction in the dollar
will be short and shallow," said Derek Halpenny, European Head
of Global Currency Research at BTM-UFJ. "The main driver will be
QE from the Fed and that should weigh on the dollar."
Investors had increased their bets against the dollar in
recent weeks and had gone long on currencies like the euro and
the Australian dollar on heightened expectations the Fed will
unveil a second round of quantitative easing.
Those stretched positions had increased chances of a
short-covering bounce for the greenback.
"The dollar's move down through September went too far and
was overdone. This bounce we saw is part of a healthy
correction," said Jane Foley, senior currency strategist at
Rabobank.
"The dollar's weakening trend remains intact, as China's
rate hike will not be slowing down its economy significantly and
this is just a temporary pause in 'risk-on' trades."
The U.S. currency is often seen as a safe haven and gains
when appetite for riskier assets or growth-linked currencies
suffers.
ON TRACK FOR QE
Several Fed officials indicated on Tuesday the U.S. central
bank will soon offer further monetary stimulus, with one saying
$100 billion a month in bond buying may be appropriate.
[].
In the UK, minutes from the Bank of England's last monetary
policy committee meeting showed a three-way split, with one
member voting for QE. []
That saw sterling fall to the day's low against the euro and
give up some of its gains against the dollar.
The pound edged up against the dollar as UK finance minister
George Osborne gave details of the harshest government spending
cuts in decades on Wednesday, taking an axe to the welfare state
in an effort to reduce a record budget deficit.
Analysts say such cuts could hurt growth and prompt the BOE
to keep monetary policy easy, keeping pressure on the pound in
the medium term.
The euro rose 0.6 percent to 87.94 pence <EURGBP=D4> while
the pound edged up to $1.5740 <GBP=D4>.
The euro was up 0.1 for the day at $1.3836 <EUR=>, steadying
from its 1.6 percent slide the previous day. It had fallen
sharply as investors trimmed some risk-taking positions after
China raised interest rates by 25 basis points, its first such
action in nearly three years.
The move spurred concerns that it could mark the start of a
more aggressive phase of monetary tightening, dampening Chinese
and global growth and denting China's voracious demand for
commodities. [].
The euro also gained against the yen <EURJPY=R>, drawing
some support from higher Chinese shares <>.
But the dollar dipped 0.3 percent to 81.24 yen <JPY=>, not
far from its 15-year low of 80.88 yen.
The higher-yielding Australian dollar rose 1 percent to a
session high of $0.9790 <AUD=D4> regaining some ground after
sliding more than 2 percent on Tuesday.
(Additional reporting by Tamawa Desai; Editing by Catherine
Evans, John Stonestreet)
