* Market thinks Fed will not begin QE just yet but cautious
* Intervention fear keeps yen buying in check
* Australian dollar below 2-year peak after RBA minutes
By Hideyuki Sano
TOKYO, Sept 21 (Reuters) - The dollar fell on Tuesday towards
a five-week low against a basket of currencies, with traders
cautious ahead of a Federal Reserve policy meeting that may
discuss the need for further easing.
It struggled at 85.50 yen <JPY=>, supported by fear of
Japanese intervention below that level but unable to rally, while
the Australian dollar remained up near a two-year peak.
Few traders expect the Fed to apply another dose of
quantitative easing (QE) just yet -- and the dollar could advance
short-term if that view proves correct.
But some said the greenback was unlikely to gain much respite
as the policy-setting Federal Open Market Committee (FOMC) would
probably signal its readiness to take QE steps if needed, keeping
expectations of more dollar-printing intact. []
"The pressure will still remain (on the dollar). The FOMC is
caught between a rock and a hard place. They would like to have
an outlook on the economy that is a bit rosier than it actually
is," said Robert Reilly, head of trading, flow, fixed income and
currencies for Asia at Societe Generale in Hong Kong.
"But in reality the way the market's pricing and looking at
it, the market is looking for the FOMC to come out and indicate
that further measures in terms of quantitative easing will maybe
remain and this will be negative for the dollar."
The dollar index fell 0.2 percent to 81.14, towards a
five-week low of 80.865 hit last week.
"I'm not sure the market's going to get too much resolution
after the FOMC today. Even if they don't signal any imminent QE,
the market's speculation is more focused on the next few months,"
said Sue Trinh, senior currency strategist at RBC in Hong Kong.
The dollar fell 0.2 percent against the yen to 85.55 yen,
keeping a tight range after Japan intervened in the market last
week for the first time in six years.
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It has failed to get above its post-intervention high of
85.94 yen set last Friday, capped by Japanese exporter selling
ahead of half-year book-closing on Sept. 30, and more sales are
expected towards the 86 yen level before then.
Its 55-day moving average, now at 85.87 yen, has become a
resistance level since Japan intervened last Wednesday, and
further resistance lies at 86.26, the bottom of its daily
Ichimoku cloud.
Rangebound yen trading since intervention has helped bring
down dollar/yen options' implied volatilities. Its one-week
volatility dropped to around 10.65/12.05 percent <JPYSWO=> after
shooting up close to 15 percent right after intervention.
In short-dated options for up to two weeks, demand for dollar
calls is stronger than dollar puts, meaning dollar calls are
trading at a premium to yen calls <JPSWRR=GFI>. Dollar puts are
normally more expensive due to Japanese exporter hedging demand.
Option traders said dollar calls with strike prices above 90
have been traded as some market players sought protection against
a possible jump in the dollar in the event of intervention.
Some market players don't rule out another push by Japanese
authorities to shunt the greenback over 86 yen. Many doubt they
would let the dollar fall below 85.00.
Still while short-term short dollar positions may have been
cleared out by last week's action, longer term players are said
to remain short.
"History shows intervention hasn't been successful over the
medium term. This year strength in the yen has been more of a
dollar weakness story and we think that's going to continue,
against other Asian currencies as well as the yen," SocGen's
Reilly said.
"A lot of longer term players have profited very well from
being long the commodity currencies and will continue to be
positioned that way and short the dollar."
The commodity-linked Aussie held near a two-year high of
$0.9495 <AUD=D4> hit on Monday after the head of its central bank
suggested Australian interest rates would rise further.
It rallied again briefly after minutes of the central bank's
September meeting showed policy makers think interest rates are
likely to rise.
But talk of a large option barrier around $0.9500 with expiry
at the end of the month helped cap its progress higher.
The euro edged up 0.2 percent to $1.3090 <EUR=>, less than a
cent below a five-week high at $1.3160 hit on Friday, despite
renewed worries over some euro zone countries debt.
A triangle is forming on the hourly euro/dollar chart with
parameters of $1.3100 and $1.3030.
While the euro holds above the $1.3030 area, some chartists
see its Aug. 6 high of $1.3334 as an upside target, but there are
hurdles before it gets there, including the triangle top and its
200-day moving average which comes in at about $1.3220.
(Additional reporting by Charlotte Cooper and Reuters FX
analysts Krishna Kumar in Sydney and Rick Lloyd in Singapore)
