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FOREX-Dollar slide to two-year low vs euro on Fed outlook

Wanfeng Zhou
Thursday, 24 Oct 2013 | 3:48 PM ET

* Euro hits 2-year peak of $1.3825, but may struggle to gain further

* Dollar weak on steady Fed policy expectations, lower U.S. yields

* Chinese data briefly boosted Australian dollar

NEW YORK, Oct 24 (Reuters) - The dollar fell to a two-year low against the euro on Thursday on expectations the U.S. Federal Reserve will continue its bond purchases well into next year.

The euro shrugged off disappointing data showing the pace of growth in euro zone business unexpectedly eased this month. Talk of heavy buying by central banks in Asia also boosted the common currency.

A shutdown of the U.S. government earlier this month and weaker-than-expected September jobs data fueled concerns about the economy. A Reuters poll showed a majority of U.S. primary dealers do not expect the Fed to start cutting stimulus until March of next year.

"Regarding the U.S. dollar, we recently moved to a small short position," said Vassilis Dagioglu, head of asset allocation portfolio management at Mellon Capital in San Francisco.

"The persistent bullish dollar theme, as a result of a perceived Fed taper that has been present since May, now seems to have diminished to a degree."

The euro rose 0.2 percent to $1.3803, having hit as high as $1.3825, according to Reuters data, its strongest since November 2011.

Markit's Flash Composite Purchasing Managers' Index (PMI) fell to 51.5 from September's two-year high of 52.2, below all forecasts in a Reuters poll that predicted an uptick to 52.5.

Some analysts said the euro may struggle to make a sustained break above $1.38.

"The disappointing tone of the euro zone data will suggest that the euro is looking toppy up here, and this should keep euro/dollar in check," said Jane Foley, senior currency strategist at Rabobank in London.

Against a basket of currencies, the dollar hit a near nine-month low of 79.081 and was last down 0.1 percent at 79.184.

In the United States, jobless claims fell less than expected in the latest week to a seasonally adjusted 350,000. The data, however, did not reflect the true picture because California continued to process a backlog of applications caused by computer problems.

A drop in the 10-year U.S. Treasury yield on Wednesday to a three-month low further dented the dollar's appeal.

The dollar slipped 0.1 percent against the yen at 97.28 yen but held above Wednesday's two-week low of 97.13 yen, according to Reuters data.

The Australian dollar got a boost from data showing Chinese manufacturing at a seven-month high in October. But it later surrendered gains and last traded at $0.9614, down 0.1 percent.

Analysts said concerns remained about rising money market rates in China, which may weigh on the Australian currency. China's benchmark seven-day repo rate rose nearly a percentage point on Thursday after China's central bank let cash flow out of the money market for a second week.

"Those underlying concerns kept currencies with close ties to China, like the Aussie and loonie (Canadian dollar), from participating in the broader risk rally," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The New Zealand dollar fell 0.5 percent to $0.8347, while the Canadian dollar also slid with the greenback rising 0.4 percent to C$1.0423.