* Dollar edges up but could decline again
* Stocks, commodities closely tied to dollar's fate
* Emerging market stocks reap heavy investment flows-EPFR
(refiles to more subscribers)
By Kevin Plumberg
HONG KONG, Oct 15 (Reuters) - Investors took profits on
gains in stocks and commodities this week while buying back the
U.S. dollar on Friday, but kept the currency close to a
10-month low ahead of a speech by the head of the Federal
Reserve.
The dollar steadied after overnight plumbing a low for the
year against major currencies, having dropped 7 percent since
September on expectations the Fed will soon have to flood the
banking system with freshly printed cash to support the
economy.
An indication that Fed Chairman Ben Bernanke is getting
closer to this decision and perhaps considering other measures
such as inflation or even gross domestic product targeting
would probably unleash more dollar selling and buying of
emerging market equities, commodities and longer-term bonds.
With bets against the dollar significantly high, the risk
of a bounce is appreciable.
"We are concerned that the market is short dollar based on
a deep expectation that the Fed Chairman will hint strongly at
an aggressive QE program," Steven Englander, head of G10
foreign exchange stratgy at Citi, said in a note.
"While we do not see the Fed as having an incentive to
disappoint the FX or bond markets, it would be easy for
hesitation to do damage at this stage."
The euro slipped 0.2 percent to $1.4048 after hitting the
highest since January on Thursday around $1.4121 <EUR=>.
The U.S. dollar index <.DXY>, a gauge of performance
against six other major currencies, was largely unchanged on
the day after dropping to the lowest since December 2009.
Focus on the dollar's decline has become intense, causing
political consternation and financial upheaval. Investors have
been busy aligning their strategies with the way other asset
markets have reacted to the weak dollar.
The Reuters-Jefferies CRB index <.CRB> and the MSCI
all-country world equities index <.MIWD00000PUS> have a 0.9
inverse correlation with the dollar index on a 90-day basis,
meaning basically stocks and commodities have been moving in
the opposite direction of the dollar.
After hitting the highest since July 2008 on Thursday,
copper traded on the London Metal Exchange slipped 0.1 percent
to $8,388 a tonne <CMCU3>, though was still set for a fourth
straight month of gains.
Gold inched up 0.2 percent to $1,379.45 an ounce <XAU=>,
but could slide back to around $1,365 if profit taking hit the
metal. Still, the near-term target according to chart analysts
is $1,404, which could be reached early next week.
In equities, Japan's Nikkei share average fell 0.7 percent
<>, hurt by weakness among banking shares. Despite a 2
percent gain on Thursday, the index continues to underperform
other Asian markets this month.
The MSCI index of Asia Pacific stocks outside Japan slipped
0.5 percent <.MIAPJ0000PUS>, with declines evenly spread across
the sectors after hitting the highest since June 2008 in the
prior session.
Having some of the biggest developing economies in the
world, Asia has been sucking in portfolio investment from
abroad at a rapid pace. In general, emerging market equity
funds have absorbed more than $60 billion in net inflows this
year, $23.3 billion of which has come since the beginning of
September, fund tracker EPFR Global said in a note.
(Additional reporting by Reuters Market Analyst Wang Tao in
SINGAPORE; Editing by Ron Popeski)
