FOREX-Dollar struggles as Yellen eyed for direction

* Global economy worries quash Fed rate hike expectation

* Yellen not seen able to rescue dollar

* Yen near 15-month high, yen calls favoured the most since 2010

By Jemima Kelly

LONDON, Feb 10 The dollar languished close to a 3-1/2-month low against a basket of major currencies on Wednesday, as traders waited for U.S. interest rate guidance from Federal Reserve Chair Janet Yellen.

The currency has shed over 3 percent over the past two weeks as expectations of a 2016 rate rise have all but vanished. Worries over sliding commodity prices, a slowing China and the health of European banks have also dampened dollar demand in favour of safe-haven assets such as the yen.

Against a basket of currencies the dollar was flat at 96.056 , having touched 95.663 on Tuesday, its weakest since October.

That low represented an almost 5 percent decline from the 12-1/2 year peak touched in early December, when consensus was for the Fed to keep raising rates this year, stoking a global capital rush of funds to higher-yielding dollar assets.

BNP Paribas currency strategist Michael Sneyd, in London, said Yellen – the text for whose congressional testimony is due at 1330 GMT – would be unlikely to provide any kind of rebound for the dollar.

“The most likely is quite a balanced assessment, in which she says the U.S. economy is doing well, but acknowledges that the market hasn’t taken this first rate hike too well and that this has led to a tightening of monetary conditions,” he said.

“It seems we’re likely to remain in this regime where the dollar continues to lose ground against the euro and the yen.”

In times of economic stress, countries or regions running current account surpluses, as are Japan, the euro zone and Switzerland, are seen as safer compared with those that have deficits and rely on foreign capital to finance the gap. The United States, UK and Australia fall into the latter category.

That explains why the euro has been supported despite surprisingly weak German industrial output data and a sell-off of European bank shares.

Having hit a 3-1/2-month high of $1.13385 on Tuesday, the euro edged down 0.2 percent to $1.12665.

The dollar fell 0.3 percent against the yen to 114.63 , close to a 15-month low of 114.05 hit the previous day.

Weakness in Japanese equities could dampen Japanese investors’ risk appetite and weigh further on the dollar versus the yen in coming months, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

The options market suggests huge demand for yen calls, or right to buy the yen. Risk reversal spreads, which measure the price gap between the yen calls and yen puts, are at their widest in favour of calls since 2010.

Source: Reuters

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