FOREX-Dollar drops as Fed's Dudley backs Fed policy; euro slides
* Euro fails to hold early gains after German election
* NY Fed Dudley says central bank must push hard against threats to U.S. recovery
* Euro zone PMIs improve, but German factory PMI dips
* Aussie rises as China manufacturing growth picks up
NEW YORK, Sept 23 (Reuters) - The dollar slumped for a second straight session against the yen on Monday as an influential Federal Reserve policymaker defended the U.S. central bank's decision last week to continue its easy money policy. William Dudley, president of the Federal Reserve Bank of New York, said that the timeline that Fed Chairman Ben Bernanke articulated in June for scaling back the central bank's stimulus measures is "still very much intact." In a strong defense of the Fed's shock move last week to keep buying bonds, New York Fed President William Dudley said fiscal uncertainties "loom very large" as Congress prepares to hash out a deal to avoid a government shutdown and raise the nation's debt ceiling. He also noted that Bernanke did not specify that the first reduction in bond buying would come at the Fed's September meeting. "The fact is that Fed officials remain as data-dependent as ever; if we see big surprises out of U.S. nonfarm payrolls data and/or CPI inflation reports, expect big dollar moves," said David Rodriguez, quantitative strategist at DailyFX in New York. "In the meantime, we think it's unlikely that the dollar breaks to fresh lows," he said. In afternoon trade, the dollar was down 0.4 percent to 98.86 yen. The dollar was flat against a basket of currencies at 80.410, holding above a seven-month low of 80.060 set last week after the Fed kept the pace of its bond-buying stimulus unchanged. Europe's common currency, meanwhile, hit session lows against the dollar and yen after European Central Bank President Mario Draghi told the European Parliament that the ECB is ready to offer banks more long-term loans to keep money-market interest rates from rising to levels that could push inflation too low. He also said euro zone interest rates would remain at current or even lower levels for some time. Draghi's remarks extended earlier losses stemming from worries about how long it will take Angela Merkel to form a coalition after her party's victory in Sunday's German election. "With euro at $1.35, the pressure on the ECB to be as dovish as possible is really accelerating," said Boris Schlossberg, managing director at BK Asset Management in New York. "The unintended consequences of the Federal Reserve's no-taper move has come at the worst possible time when German manufacturing exports are beginning to slow. So I think monetary officials in Europe will do everything possible to try to dampen the rise in the euro." The euro was last down 0.2 percent at $1.3502, staying below chart resistance at last week's 7-1/2-month high of $1.3569. It fell 0.6 percent versus the yen, to 133.54 . The outcome of Germany's election drove initial weakness in the euro. Merkel's conservatives fell short of the votes needed to rule on their own and may have to convince leftist rivals to join them in government. Data showing above-forecast euro zone private sector business activity this month gave the single currency only a slight lift. Putting pressure on the euro were numbers showing that German manufacturing activity growth unexpectedly slowed, according to Markit purchasing managers' index data.
Tuesday's German Ifo sentiment data is likely to be closely watched. Analysts at UBS, however, said it "seems unlikely" the Fed would choose to act so soon after an unchanged policy decision. They said last week's Fed decision would keep the dollar weak for one quarter before its longer-term uptrend resumed and revised up their one- and three-month forecasts for euro/dollar to $1.37 and $1.35, from $1.30 and $1.28 previously. The growth-linked Australian dollar was up 0.5 percent at US$0.9444, after data showing China's factory sector growth accelerated in September.