FOREX-Dollar suffers after Summers pulls out of Fed race
* Dollar hits 3-1/2 week lows vs currency basket
* Summers drops from race to be next Fed chief
* Fed Sept 17-18 meeting still main focus
LONDON, Sept 16 (Reuters) - The U.S. dollar slipped to a near four-week low against a basket of currencies as prospects of the Federal Reserve keeping policy loose for longer increased after Lawrence Summers withdrew from the race for the next Fed chief.
Summers is perceived by markets as relatively hawkish and his decision could leave Janet Yellen, a well known policy dove, as front runner for the top job. President Barrack Obama has accepted Summers' withdrawal.
The dollar index was down 0.1 percent at 81.069, not far from the intra-day trough of 81.047, its lowest since Aug. 21.
"We expected the dollar to be lower as we come towards the Fed meeting this week, the Summers' announcement just intensified the dollar down move," said Adam Myers, senior FX strategist at Credit Agricole.
The euro was up 0.6 percent at 1.3370, having jumped to a 2-1/2 week high around $1.3383 earlier.
Myers said the pair could now target the Aug. 20 high of $1.3453.
Against the yen, the dollar was down 0.6 percent at 98.75 yen, close to the day's low of 98.45 yen which was the lowest since Sept. 2.
The news of Summers' withdrawal also capped the recent rise in U.S. 10-year Treasury yields, which were last at 2.8162 percent, some way off the 3.007 percent hit on Sept. 6, which was a more than two-year high.
The dollar was already under pressure on recent disappointing U.S. economic data and as markets positioned for the Fed to scale back its massive $85 billion monthly bond-buying stimulus by a modest $10 billion later this week, following the Sept. 17-18 meeting.
"The expectation, and hope, is for a dovish outcome," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore. Risky assets could take a hit if the Fed were to taper its stimulus by a larger than expected amount, such as by $20 billion or more, Okagawa added.
Credit Agricole's Myers said that if the Fed trimmed by a slightly larger than expected $15 billion, the dollar could get an initial knee-jerk boost, but the central bank might have a firm forward guidance message which could drag the dollar lower.
"Markets haven't yet focussed on the stronger forward guidance language that could accompany the tapering announcement... for example reinforcing that the Fed funds rate is not going to go up all through 2014 and perhaps 2015... that will be the more dominant factor and pull the dollar lower."
The dollar also lost ground against commodity currencies such as the Australian and New Zealand dollars.
The Aussie set a three-month high of $0.9370 AUD=D4, while the kiwi jumped to $0.8234 NZD=D4, near highs last seen in May.