FOREX-Dollar falls as markets reassess Fed; higher trend stays
* Fed dents hopes of stimulus reduction in coming months
* Dollar poised to resume rally on U.S. growth, higher yields
* BOJ holds rates, sounds optimistic on economy
NEW YORK, July 11 (Reuters) - The U.S. dollar fell to multi-week lows against the euro and yen on Thursday as traders scaled back expectations that the Federal Reserve will slow its asset purchases in coming months.
Fed Chairman Ben Bernanke said on Wednesday the U.S. central bank would continue its accommodative monetary policy because of low inflation and weakness in the labor market.
Investors had driven the dollar to three-year peaks against a basket of currencies this week on bets the Fed will start reducing its stimulus as early as September. The Fed's $85-billion monthly bond-buying has pressured the dollar because it is tantamount to printing money.
"The dramatic drop in the dollar highlights how one-sided the market had become and how quickly traders raced to close out long dollar positions," said Camilla Sutton, chief foreign exchange strategist at Scotiabank in Toronto.
Minutes of the Fed's June meeting, released Wednesday, also supported the view of the Fed keeping status quo for longer, with many policymakers wanting reassurance the U.S. jobs recovery was on solid ground before any policy retreat.
The euro rose 0.6 percent to $1.3058, having climbed to $1.3201, according to Reuters data, its strongest since June 21.
The euro zone common currency has been under pressure as the European Central Bank last week clearly indicated it would keep interest rates low for an "extended period." ECB policymaker Jens Weidmann, however, said Thursday the central bank could hike rates if inflationary pressures re-emerged.
The dollar lost 0.6 percent to 99.07 yen after hitting a two-week low of 98.27 yen. Chartists said a weekly close above 98.75 in dollar/yen would be a signal that the dollar is retaining its upward bias.
The dollar extended losses against the yen after the Bank of Japan kept its policy on hold and had its most upbeat assessment in two and a half years. But analysts said the fall in the pair was likely to be short-lived.
In data release on Thursday, U.S. jobless claims showed the number of Americans filing new claims for unemployment benefits rose last week, although the level still pointed to healing in the job market.
Separate U.S. data showed prices for imports and exports fell in June for a fourth straight month, a sign of cooler economic growth worldwide that could weigh on the American economy and unnerve policymakers.
Despite the selloff, analysts said the dollar remains poised to gain further against most of the major currencies.
Debates in the United States have focused on the timing of a reduction of central bank stimulus. In contrast, central banks in the euro zone, UK and Japan remain biased for further easing.
Strategists at Citigroup said the dollar's weakness in response to Bernanke and Fed meeting minutes may look overdone relative to the moves in other currencies such as bonds.
"We suspect that drivers like market long dollar positioning may have played a role," they wrote to clients. "Despite Fed's cautiousness last night, the U.S. growth story is still the most compelling in G4. The U.S. cyclical leadership will continue to support the dollar and U.S. Treasury yields in our view."
The dollar's moves have been highly correlated to Treasury yields, which move inversely to price. Treasuries, as well as stocks, rallied on the perceived dovish comments from Bernanke.
Any push back in the timeline of Fed tapering will probably put downward pressure on yields and the dollar in the near term.
The dollar index, which tracks the greenback against a basket of six currencies, fell 1.34 percent to 82.917. It had hit 82.418, its lowest since June 25, retreating further from a three-year high of 84.753 touched on Tuesday.