FOREX-Dlr weakens as U.S. rate travel expectations ease

Mon Feb 22, 2010 4:05am EST

* Dollar down 0.2 pct versus currency basket

Currencies

* Cautious return of risk appetite after U.S. CPI

* German media report on Greek bailout supports euro

(Adds quote, detail; previous TOKYO)

By Neal Armstrong

LONDON, Feb 22 (Reuters) - The dollar weakened on Monday asinvestors reassessed the chances of an earlier-than-expectedinterest rate hike by the Federal Reserve, prompting a degree ofrecovery in risk appetite.

Currency markets took the Fed"s surprise discount ratedecision last week as a signal the U.S. central bank was comingcloser to tightening its benchmark rate, despite assurances fromFed policymakers to the contrary.

But a benign U.S. inflation reading on Friday, with consumerprices rising less than forecast in January [ID:nN19117929],caused markets to pull back those rate expectations, in turnprovoking a cautious return to risk appetite.

"There is some recovery in risk appetite, with marketsbelieving the CPI data will help to anchor the U.S. rate curve,even though the Fed hiked the discount rate last week," said RayFarris, chief currency strategist at Credit Suisse.

At 0840 GMT, the dollar was trading down 0.1 percent againsta basket of currencies .DXY, with the index at 80.570 afterhitting an eight-month high on Friday of 81.342 in the aftermathof the Fed discount rate hike.

The greenback held slight gains versus the euro EUR=,which traded at $1.3625 and gained support from reports thatGermany had prepared plans under which countries using thesingle currency would provide aid worth between 20 billion and25 billion euros for debt-laden Greece. [ID:nLDE61J05O]

Sentiment towards Greece has been weighed down by persistentconcerns about its ability to service a spiralling budgetdeficit, in turn forcing the euro down more than 10 percent fromits December 2009 highs.

The single European currency had hit a nine-month low of$1.3443 on Friday before bouncing back after the U.S. CPI data.

Currency speculators raised net euro short positions to arecord high in the week ended Feb. 16, and traders say anybounce in the single currency is merely a positioningadjustment.

"This is just a pause in the overall downtrend, the moves wehave seen are flow-driven and I would expect more dollarstrength to come," said Westpac currency analyst LaurenRosborough.

For a graphic on euro positioning, click

here

WAITING FOR BERNANKE

This week, all eyes will be on Fed chief Ben Bernanke"stestimony in Congress on Wednesday and Thursday. Investors willbe looking for clues on rates after the discount rate rise.

"Comments from Bernanke are expected to be similar to onesby other Fed officials last week, playing down the possibilityof an early hike in the fed funds rate," a trader at a Japanesebank said.

The dollar gave up slight gains versus the yen JPY= totrade flat at 91.60 yen. It hit a one-month high of 92.14 onFriday as the greenback made broad-based gains.

The yen stayed soft against the euro as the slight return torisk appetite allowed for some buoyancy in carry trades. It wastrading flat at 124.68 yen after moving back above 125.00 inAsia amidst a positive day for Asian equity markets.

(Additional reporting by Kaori Kaneko; Editing by NigelStephenson)

Currencies