The dollar dipped against a basket of currencies today, trimming gains it made after a surprise rate hike by China spurred the market to lower risk exposure, but was seen likely to stay supported due to the potential for further short-covering.
The dollar index dipped 0.2 per cent to 78.011 after climbing more than 1.6 per cent the previous day.
But its breach of resistance near 77.93, its October 12th high, and through 77.894, a 23.6 per cent retracement of its August-October slide, could pave the way for a move to the 78.96-98 area, which would be a 38.2 per cent retracement of that August-October drop.
Investors had increased their bets against the dollar in recent weeks on heightened market expectations for the Federal Reserve to unveil a second round of quantitative easing as early as November.
That positioning had pointed to chances of a short-covering bounce in the dollar.
A string of Federal Reserve officials indicated on Tuesday that the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buying may be appropriate.
But some internal resistance to the unconventional policy was still evident, and Federal Reserve Governor Elizabeth Duke said more easing at the Fed's November meeting is not a done deal.
The commodity-sensitive Australian dollar rose 0.5 per cent to $0.9754 regaining a bit of ground after sliding more than 2 per cent yesterday.
The Australian dollar has pulled back after climbing to $1.0004 late last week, its first rise above parity since the currency was floated in 1983.
"Given that the Aussie and euro have risen so sharply since September, I wouldn't be surprised if they face more correction in the near term," said a trader at a Japanese bank.
Investors had trimmed some of their risk-taking positions yesterday after China raised interest rates by 25 basis points in its first tightening in nearly three years.
The move spurred concerns that it could mark the start of a more aggressive phase of monetary tightening, dampening Chinese and global growth and denting China's voracious demand for commodities.
Traders had fretted that the yen could strengthen broadly if Chinese and Asian shares were to fall sharply, but as it turned out Chinese shares rose 0.8 per cent after having fallen initially.
The Australian dollar edged up 0.3 per cent against the yen to 79.33 yen, with one trader citing Aussie/yen buying by Japanese investors.
Some analysts said the market's reaction the previous day was overblown, and with the Federal Reserve set to ease monetary policy further as early as next month any dollar rebound would be short-lived.
"What I think will be short-lived is the weakness in Asian and commodity currencies in particular," said Greg Gibbs, a strategist at RBS in Sydney.
"I don't think the hike in China is too significant in terms of actually slowing down growth there. I wouldn't view that as a factor to be getting bearish on risk or bearish on Asian growth."
The euro rose 0.3 per cent to $1.3773, edging up after its 1.6 per cent slide the previous day.
The euro has major support near $1.3580, a 38.2 per cent retracement of a rise from the September 10 low of $1.2642 to last Friday's peak of $1.4161.
The dollar dipped 0.3 per cent to 81.38 yen.
Reuters