FOREX-Dollar near 4-week low after Summers drops out of Fed race
TOKYO, Sept 17 (Reuters) - The dollar stayed near a four-week low on Tuesday after Lawrence Summers' withdrawal from the race to lead the Federal Reserve reduced expectations of a faster pace of monetary policy tightening by the U.S. central bank.
The decision by the former U.S. Treasury secretary - who is regarded by investors as relatively hawkish - left Federal Reserve Vice Chair Janet Yellen as the front-runner. Traders said the Fed is likely to continue a slow, cautious approach to tightening policy if Yellen is named to replace current Chairman Ben Bernanke.
The dollar index, which measures the greenback against six major currencies, stood at 81.27, after having fallen to 80.968, its lowest since Aug. 21, on Monday.
A break of the Aug. 20 low of 80.754 could open the way for a test of its June low around 80.50.
The dollar has been under pressure as recent disappointing economic data has prompted markets to expect the Fed to reduce its $85 billion monthly bond-buying stimulus by only a modest $10 billion.
Still, with the Fed looking set to take its first, albeit small, step to wind back its stimulus at its two-day policy meeting starting on Tuesday, investors are looking to the Fed's guidance on its future policy stance.
"On top of the size of tapering, what's more important this time is the Fed's forecast of interest rates in 2016, which will give markets an idea on the pace of future rate hikes," said Sho Aoyama, senior market analyst at Mizuho Securities.
Analysts say rate hike expectations hold the key because of their impact on short-term U.S. bond yields and thereby the dollar's yield attraction.
A faster pace of rate increases would make the dollar more attractive given that many other central banks, such as the European Central Bank and the Bank of Japan, are perceived to be nowhere near tightening.
The euro traded at $1.3335, little changed on the day, after having risen to $1.3385 on Monday.
Against the yen, the dollar stood at 99.17 yen, having bounced back from 98.45 on Monday.
"It seems like there's fairly firm support around 98.40. I don't expect the dollar to fall sharply below that level," said a trader at a Japanese bank.
The British pound held firmer, staying near an eight-month high hit on Monday as it drew support from a string of solid UK economic data in recent weeks.
The pound traded at $1.5904 after having risen to $1.5963 on Monday, its highest since January.