* Dollar edges up but faces risks that could drag it lower
* Will Bernanke talk QE? Will the US brand China
manipulator?
* Stocks, commodities closely tied to dollar's fate
By Kevin Plumberg
HONG KONG, Oct 15 (Reuters) - Investors took profits on
gains in Asian equities this week but kept the U.S. dollar
close to a 10-month low and commodities near two-year highs
ahead of a speech by the head of the Federal Reserve.
Major European stock markets opened higher, with Britain's
FTSE 100 <> up 0.13 percent, France's CAC 40 <> up
0.23 percent and Germany's DAX <> rising 0.4 percent.
The dollar steadied after plumbing a low for the year
against major currencies overnight, 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
close to this decision and perhaps considering other measures
such as targeting inflation or even gross domestic product
could unleash more dollar selling and buying of emerging market
equities, commodities and longer-term bonds. []
However, with bets against the dollar significantly large,
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 programme," Steven Englander, head of G10
foreign exchange stratgey 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 was steady at $1.4069 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.
In addition to Bernanke's speech, investors are also on the
lookout for a decision by the White House on whether to name
China a currency manipulator, a moniker that could cool
Sino-U.S. relations ahead of a G20 summit in November meant to
soothe global currency tensions. []
IN THE DOLLAR'S WAKE
The dollar's decline as a result of very loose Fed policy
has drawn political consternation and triggered financial
upheaval. Investors have been meanwhile aligning their
portfolios with how 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.
The CRB index of 19 commodity prices <.CRB> reached its
highest since October 2008 on Thursday.
After hitting the highest since July 2008 on Thursday,
London Metal Exchange copper edged up 0.4 percent to $8,430 a
tonne <CMCU3>, on track for a fourth month of gains.
Gold inched up 0.3 percent to $1,380.35 an ounce <XAU=>,
but could slide back to around $1,365 if profit taking kicks
in. 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 finished 0.9
percent <> lower, 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
0.2 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.
Traders in Asia bought back some of the U.S. Treasuries
sold during Thursday's U.S. session. The 10-year yield slipped
to 2.49 percent <US10YT=RR> compared with 2.51 percent late in
New York.
With the benchmark yield dropping like a stone since April,
down 134 basis points, investors and dealers alike were
wondering just how much further could they fall if Bernanke
flags another round of quantitative easing.
"I feel it's a bit unhealthy that financial markets from
the dollar to gold and emerging market shares are already
rising on quantitative easing hopes when the Fed hasn't even
started it," said a trader at a Japanese bank.
"But it's hard to argue against a further fall in U.S. bond
yields. I expect the 10-year yield to stay in a 2.0-2.5 percent
band in the near future."
(Additional reporting by Reuters Market Analyst Wang Tao in
SINGAPORE and Hideyuki Sano in TOKYO; Editing by Nick Macfie)
