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The dollar won a
reprieve on Monday after last week’s steep slide but traders said it
could head for a test of its all-time low against a basket of
currencies if the U.S. Federal Reserve takes a cautious stance towards
tightening later in the week.

In thin trade due
to Easter holidays in Australia and much of Europe, Japanese importer
bids for dollars were enough to boost the U.S. currency against the yen
and help it to erase earlier losses against other currencies.

Still, the
combination of upbeat global growth, signs of weaker U.S. growth, and
the spectre of dovish Fed policy is expected to support fund flows to
higher-yielding currencies such as the euro and the Australian dollar
from the U.S. currency, traders said.

“I doubt there’s
much dollar carry-trade out there but when market players are eager to
take risk, they tend to look to interest rate gaps on speculation that
the dollar could be used as a funding currency,” said Kimihiko Tomita,
the head of foreign exchange at State Street Capital Markets.

With dollar
interest rates seen taking a pivotal role in the market, players are
looking to a news conference by chairman, Ben Bernanke, on Wednesday
after the Central Bank’s two-day policy meeting – the first regularly
scheduled news briefing by a Fed chief in the Central Bank’s 97-year
history – to see how the Fed plans to seek an exit from its easy
monetary policy.

“It’s all up the
Fed and Bernanke’s stance at his news conference. The dollar could fall
further depending on U.S. interest rates,” said a trader at a Japanese
bank.

In Asian trade, the
Australian dollar rose to a fresh 29-year high of $1.0777, as the
prices of gold and commodities continue to rise, before slipping back
to $1.0735.

Gold hit a lifetime
high while silver surged 4 per cent on the U.S. futures market. The
euro/dollar rate gave up early gains to stand flat at $1.4568, but it
remained near a 16-month high of $1.4649 hit last week.

Against the yen,
the dollar ticked up 0.4 per cent to about 82.20 yen, helped by
expectations of Japanese investor buying, including by asset management
firms which tend to launch new investment trusts at the end of the
month.

U.S. policy

Traders also said
dollar selling by Japanese exporters had been limited since last
month’s earthquake, as supply chain disruptions were making it
difficult to export their products.

Japanese automakers
said on Monday their production in March fell more than 50 per cent
from a year earlier, with Toyota Motor, the world’s largest carmaker,
reporting a 62.7 per cent drop in output.

The dollar index,
which measures the currency’s value against six major currencies, rose
slightly to 74.07, but many traders say it could test a three-year low
of 73.735 hit last week. A break of that could open the way for a test
of the record low of 70.698 hit in 2008.

The dollar has been
falling due to perceptions that the United States is set to maintain an
easy monetary policy, even as most other major global economies, with
the exception of disaster-stricken Japan, look to tighter monetary
policy to rein in inflation.

Some analysts say
worries about rising U.S. debt and political bickering in Washington
over how to tackle the U.S. budget deficit are also undermining the
dollar, making it easier for speculators to sell the currency, although
there is no evidence that foreign investors are dumping their U.S.
assets.

As speculators have already piled up short dollar positions, some market players think the dollar could see a rebound soon.

Data from the U.S.
Commodity and Futures Trading Commission showed that speculators
remained overwhelmingly bearish on the dollar, even after trimming
their huge long positions in the euro and the Australian dollar in the
week to April 19.

Still, many traders
think that, for the dollar to rise, it will need a clear signal from
the Fed that the Central Bank will be on course to raise rates – a
scenario many traders are sceptical about.

The Fed is widely
expected to stick to completing its $600 billion asset purchase
programme in June but many market players think a backdrop of
softer-than-expected economic data, weak housing markets, and possible
government austerity measures to tackle the budget deficit all make it
more likely the Fed will keep its support for the recovery in place for
some time.

Many analysts
believe the U.S. Central Bank will hold the size of its balance sheet
steady by reinvesting maturing assets after June to avoid a passive
tightening – an issue that will likely be discussed at the April 26-27
meeting. Reuters