* Dollar rises vs euro, yen
* US ISM manufacturing report spurs dollar short-covering
* Fed expected to deliver around $500 bln of easing
* US polls could eventually affect FX if gridlock prevails
(Recasts to focus on election, updates prices, adds comment,
changes byline)
By Steven C. Johnson
NEW YORK, Nov 1 (Reuters) - The dollar rose on Monday
against the euro and yen as investors prepared for a midterm
U.S. congressional election and more monetary easing from the
Federal Reserve in the days ahead.
Currency traders, like their brethren across markets, have
been singularly focused on the Fed for months now, and few
expect Tuesday's election to change that.
The poll certainly had little impact on exchange rates on
Monday, when a surprisingly strong report on the U.S.
manufacturing sector that helped push the dollar higher. For
details, see []]
Yet if a fresh round of Fed easing is already priced in on
currency markets, some analysts say a big Republican election
victory, while widely predicted by opinion polls, may not be.
Most agree the election will not have much immediate impact
on currencies. But some say enmity between Republicans and
Democratic President Barack Obama could paralyze U.S. fiscal
policy, leaving the Fed on its own to improve a weak economy.
"I think the election result is going to sneak up on the
currency market after the fact, because if we get a very
unhealthy stalemate on the fiscal side, I think it will have a
longer-term negative impact on the dollar," said Boris
Schlossberg, director of research at GFT Forex in New York.
The dollar has lost 7.5 percent <.DXY> against major
currencies since September in anticipation of Fed easing. Most
economists expect the Fed to buy $80 billion to $100 billion in
assets per month, according to a Reuters poll, with total
purchases seen at anywhere from $250 billion to $2 trillion.
For a graphic on Fed easing's impact on asset prices,
please click on http://r.reuters.com/kyw48p.
But its decline has slowed in recent weeks, as traders
pared expectations of how aggressive the Fed might be and as
bets against the dollar swelled. []
The dollar was up 0.2 percent at 80.59 yen <JPY=> while the
euro <EUR=> slipped 0.4 percent to $1.3882.
FED DOING HEAVY LIFTING
Schlossberg said he thinks the Fed has opted to launch a
second round of easing -- it bought $1.7 trillion of Treasury
and mortgage debt in a first round -- partly because political
hurdles have made it harder to rely on fiscal stimulus.
Congress passed a stimulus package of tax cuts and
government spending in 2009 now valued at $814 billion,
according to the Congressional Budget Office, but Republicans
and some Democrats have said it did little to help the economy
and have been hostile to talk of more federal spending.
"The Fed is not so naive as to think quantitative easing
will be a silver bullet," he said. "But I think the reason
they're doing it is partly because they see a vacuum on the
fiscal side. That could get worse if we have gridlock and hurt
the dollar if markets view U.S. politics as unstable."
Some analysts, however, said the dollar could rally if a
new Congress succeeds in extending Bush-era tax cuts set to
expire in 2011.
STRETCHED SHORT DOLLAR TRADE
Nearer-term, the dollar's fortunes are very much dependent
on what the Fed does on Wednesday.
"Markets are expecting about $500 billion total over the
next two quarters, so if we get close to that, I think the
dollar struggles," said UBS strategist Amelia Bourdeau. "But if
the Fed offers less, I think people will cover dollar shorts."
Dean Popplewell, chief strategist at FX brokerage OANDA in
Toronto, said he thinks the smart money is on more gradual
Fed approach, which should give the dollar a near-term boost.
He said concern about the global impact of super loose U.S.
policy would also keep the Fed cautious.
Dollar weakness forced Japan to intervene in currency
markets to weaken the yen last month for the first time since
2004, and intervention fears rose again on Monday after the
dollar spiked against the yen briefly in overnight trade.
The dollar hit a 15-year low of 80.21 yen <JPY=EBS> and was
close to an all-time low around 79.75 yen.
Once the Fed meeting is over, Popplewell said markets may
renew their focus on still lingering debt problems in Ireland,
Greece and other peripheral euro zone countries.
"I'd want to be changing tactics to start looking at Europe
more carefully, as the cracks are still there and that's not
good for the euro," he said. He predicted the currency could
retreat to the $1.3350-$1.35 range by year end but said further
losses would be capped by a weak U.S. holiday spending season.
(Editing by Dan Grebler)
