* Drop in Treasury yields weighs on U.S. currency
* Investors get ready for next week's Fed meeting
* 1-week implied vols for euro/dollar rise
(Adds comment, details, updates prices)
By Naomi Tajitsu
LONDON, Oct 28 (Reuters) - The dollar slipped on Thursday,
relinquishing some of its gains from earlier this week as a
short-covering rally ran out of steam and U.S. Treasury yields
fell after a spike the previous day.
Traders said dollar selling against the euro and other
currencies by reserve managers was also helping to push the U.S.
currency down.
Investors trimmed extreme short dollar positions earlier
this week as speculation that the Federal Reserve might announce
plans to buy more assets to stimulate the economy next week
turned into a guessing game about how much they would purchase.
The New York Federal Reserve has surveyed bond dealers and
investors over the size and impact of a quantitative easing
programme, with scenarios ranging from zero up to $1 trillion,
Bloomberg news reported on Thursday, citing a copy of the
survey. []
"We'd seen a short squeeze in the dollar in the past few
days due to an exhaustion in positioning, but when there's no
incentive to maintain that, you get some profit taking," said
Peter Frank, currency strategist at Societe Generale.
"The issue is whether the market believes the Fed will
deliver significant quantitative easing over a definitive time
line. If they do, the dollar will weaken."
A Reuters poll showed Wall Street analysts expect the
Federal Reserve to buy $80 billion to $100 billion worth of
assets per month under a new programme widely expected to be
unveiled on Nov. 3. []
"We're seeing some consolidation in the dollar before the
Fed meeting as no-one knows how much QE the Fed might do," said
Marcus Hettinger, global currency strategist at Credit Suisse in
Zurich.
Other analysts said the dollar was also weighed down by a
narrowing in spreads between 10-year U.S. and euro zone
government bonds driven by a fall in U.S. Treasury yields.
By 1130 GMT, the euro <EUR=> had risen 0.6 percent on the
day to $1.3849, helped by steady buying by Asian central banks.
This helped to push the dollar <.DXY> 0.62 percent lower versus
a currency basket.
EURO RIDES PERIPHERY CONCERNS
The euro held above a one-week low around $1.3730 hit on
Wednesday, even as debt concerns in Ireland and Greece and a
breakdown in budget talks in Portugal highlighted problems
facing periphery euro zone countries.
Frank at SG said that support for the euro despite sovereign
debt issues illustrated the resilience of the single currency,
and that he expected it to rise back above $1.40 in the near
term.
But worries about the banking sector and the region's debt
problems could check the euro's gains. The European Central
Bank's quarterly Bank Lending Survey said more banks expect to
tighten their credit standards for corporate loans in Q4.
The news could check hawkish ECB intentions to scale back
emergency stimulus measures, said Tom Levinson, a forex
strategist at ING. "This serves as a warning on what is going on
in the real economy. It's less of a positive for euro but the
real dominant force is still the U.S. story."
Lingering uncertainty about how the Fed will announce more
QE has increased market volatility, with one-week implied
volatility for euro/dollar <EURSWO=> jumping to 15.9 percent on
Thursday from 12.6 percent at the start of the week.
Against the yen, the dollar <JPY=> fell 0.6 percent to
81.26. The Japanese currency showed little reaction to a Bank of
Japan decision to keep interest rates virtually at zero while
holding off from new policy initiatives.
The dollar is holding above a 15-year low of 80.41 yen hit
earlier this week, but investors remain vigilant for any
yen-weakening intervention after authorities entered the market
last month.
(Additional reporting by Nia Williams; Editing by Hugh Lawson)
