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FOREX-Dollar underpinned by Fed tapering expectations

Anirban Nag
Wednesday, 13 Nov 2013 | 4:15 AM ET

* Dollar supported by Fed tapering expectations

* Yen near 2-month low vs dollar on higher U.S. bond yields

* Sterling in focus ahead of BoE report

LONDON, Nov 13 (Reuters) - The dollar rose against the euro and hovered close to a two-month high against the yen on Wednesday after an influential member of the Federal Reserve kept the door open to a first reduction in monetary stimulus in December.

Atlanta Fed President Dennis Lockhart, seen as a centrist in policy terms, said on Tuesday a cut in the Fed's bond-buying operations remained a possibility in December.

Attention now is on the comments that nominee Fed President Janet Yellen will make at her Senate confirmation hearing on Thursday.

The euro was also pegged back slightly by more signs of falling price pressures in the euro zone, a factor that will keep alive speculation of more monetary easing by the European Central Bank. Data on Wednesday showed Spanish prices fell in October for the first time in four years.

The euro slipped to $1.3430 in European trade, from a session high of $1.34535 in Asian trade. It was still holding above its two-month low of $1.3295 struck immediately after the ECB cut rates last Thursday in a surprise move.

"The Spanish inflation numbers were slightly below their earlier reading which tells you that the ECB will have to take fresh easing measures," said Alvin Tan, currency strategist at Societe Generale.

"Having said that, we do not expect the euro to fall sharply against the dollar unless we get more signs that the Fed will start to taper. For that, Yellen's confirmation hearings will be important for near term direction in the dollar."

The dollar eased 0.1 percent to 99.52 yen, not far from a two-month high of 99.80 yen struck on Tuesday. The greenback is still up about 0.4 percent so far this week, as it drew strength from rising U.S. bond yields.

Higher U.S. bond yields tend to favour the dollar by making dollar-denominated debt more attractive to bond investors. The 10-year U.S. yield has risen almost 20 basis points since the payroll data last Friday. Treasury yields are now likely to take cue from Yellen's views on monetary policy.

"Since Yellen has become a candidate to succeed Ben Bernanke, she has hardly spoken about her view on monetary policy. Because the market doesn't seem to doubt she is a dove, there's a chance she is not as dovish as expected," said Ichiro Asai, economist at Daiwa Securities.

Sterling was 0.1 percent lower at $1.5887, having struck a two-month low of $1.5854 on Tuesday after lower-than-expected inflation reading.