* Dollar edges up vs yen, euro
* Aussie drops after tame inflation data
* Dollar seen supported by short-covering
* WSJ: Fed eyes gradual bond buying several hundred bln dlrs
By Masayuki Kitano
TOKYO, Oct 27 (Reuters) - The dollar edged higher against the
yen and euro on Wednesday after the Wall Street Journal said the
Federal Reserve was likely to unveil plans for gradual Treasury
purchases at its policy meeting next week.
The newspaper said the Fed is likely to reveal a programme of
U.S. Treasury bond purchases worth several hundred billion
dollars over several months. []
What the report called a "measured approach" compares with
investors' base-case scenario for an initial commitment to buy at
least $500 billion in Treasury debt.
In a Reuters survey earlier this month, U.S. primary dealers'
projections for the size of the Fed's expected quantitative
easing had ranged from $500 billion to $1.5 trillion. []
"The market has had in mind a figure of $1 trillion or more
and we had been in a situation where that had led to dollar
weakness," said Masafumi Yamamoto, chief FX strategist Japan for
Barclays Capital.
"Compared to that, the initial size may seem small," he said,
adding that the report could prompt some market players to cover
short dollar positions.
The Wall Street Journal said the Fed could leave open the
possibility of more purchases in the future. Or it could halt the
programme if the economy or inflation took off surprisingly, the
newspaper said.
The euro dipped 0.3 percent to $1.3820 <EUR=>, having slipped
as low as $1.3802 earlier.
An option barrier for the euro lies at $1.3800, a break of
which could open way for a test of its recent low near $1.3700,
said a trader for a Japanese brokerage house.
Traders may be cautious about chasing the euro lower,
however, given that it rebounded sharply last week after hitting
that trough near $1.3700, the trader said.
One major support may be at around $1.3787, a 76.4 percent
retracement of its latest rebound from the low around $1.37 to
Monday's high.
The dollar rose 0.2 percent to 81.63 yen <JPY=>, pulling
further away from a 15-year low of 80.41 yen struck on trading
platform EBS earlier this week.
The dollar has risen above its five-day moving average for
the first time in about a month, giving dollar bulls some hopes
for a further rebound.
But it is seen likely to meet formidable resistance at around
82 yen in view of selling interest by Japanese exporters.
"The consensus has been for roughly $500 billion after the
November FOMC meeting so the fact that the Wall Street Journal
story seems to say a few hundred billion, it seems to be a little
less than what would be considered consensus," said Sue Trinh, a
senior FX strategist at RBC Hong Kong.
"There's been a bit of a scramble to cover dollar shorts as
the market has reassessed what it might mean relative to
consensus," Trinh said.
Growing expectations the Fed may proceed more cautiously than
previously thought if it launches a new round of monetary easing
at next week's policy meeting had given the dollar a boost on
Tuesday.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
PDF on G20's uneasy truce: http://r.reuters.com/nan99p
FX column on the Fed: []
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Partly reflecting that caution, U.S. Treasury yields climbed,
with the benchmark 10-year yield <US10YT=RR> rising to one-month
highs above 2.6 percent on Tuesday. Traders said that rise in
Treasury yields was helping to lend the greenback support.
"As you can tell from the rise in U.S. bond yields, basically
the markets have fully priced in the chance that the Fed will
start quantitative easing. We'll probably have to wait for the
details for the next direction of the market," said a trader at a
Japanese brokerage house.
The Australian dollar slid 1.2 percent to $0.9743 <AUD=D4>,
coming under pressure after data showing Australian consumer
prices climbed by less than expected last quarter while the
annual pace of core inflation was the slowest in five years,
greatly lessening the urgency for a hike in interest rates next
week. []
Immediate support is seen around $0.9660, its low last week.
Market players have been bracing for a possible
short-covering bounce in the dollar against other currencies,
given a recent buildup in bets that the dollar would fall.
Latest U.S. Commodity Futures Trading Commission data shows
currency speculators still have hefty short positions in the
dollar, even after having trimmed such bets recently.
The value of the dollar's net short position fell to $25.8
billion in the week ended Oct. 19. Net short dollar positions
totalled about $30 billion two weeks ago, the biggest bet against
the greenback since at least June 2008. []
(Editing by Michael Watson)
(Additional reporting by Charlotte Cooper and Hideyuki Sano in
Tokyo and Wayne Cole in Sydney)
