NEW YORK (Reuters) - The dollar fell to a four-week low on Monday after former U.S. Treasury Secretary Lawrence Summers withdrew his name as a candidate to lead the Federal Reserve.
Summers is perceived by investors as relatively hawkish, and his withdrawal suggests there will be a more gradual approach to tightening monetary policy, which is a negative for the dollar.
His decision to withdraw could leave Janet Yellen, the Fed’s vice chair, as the front-runner for the top job. President Barack Obama accepted Summers’ withdrawal on Sunday.
Yellen is largely expected to continue with the generally accommodative stance of the current Fed chair, Ben Bernanke, if named to take his place.
In late afternoon trading, the dollar index, which measures the greenback against six major currencies, fell 0.2 percent to 81.273. It earlier fell to 80.968, its lowest since August 21.
The announcement that Summers was pulling out of the running sparked a rise in risk tolerance, with emerging market currencies getting a bid against the dollar.
But Stephen Jen, co-founder of London-based investment firm SLJ Macro Partners, believes any rally in emerging market currencies and sell-off in the dollar will likely be short-lived.
“The medium-term trend in the dollar and the Treasury yield should broadly reflect the trajectory of the U.S. economy, which is up in my view,” he said.
Some analysts added that it would be tough to see the dollar move much lower ahead of the Fed’s two-day policy meeting starting on Tuesday.
Against the yen, the dollar was down 0.2 percent at 99.12 yen, close to the day’s low of 98.48 yen, which was the lowest since September 6, using Reuters data.
The euro was up 0.3 percent at $1.3336, after hitting a roughly three-week high around $1.3385. Strategists said the pair could now target the August 20 high of $1.3416.
The South African rand was the best performing of the 36 most actively traded currencies against the dollar, up 1.8 percent against the dollar on Monday.
Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said most emerging market currencies have at least halved their summer losses, although a pair of recent interest rate increases in Indonesia are still “not enough to sound the all-clear (signal) from wary buyers of the rupiah.”
The dollar has been under pressure on recent disappointing economic data and as markets braced for an expected reduction by the Fed this week of its $85 billion monthly bond-buying stimulus by a modest $10 billion.
“The consensus for Wednesday has now swung to expect a very dovish tapering: $10 billion, combined with very dovish language and forward guidance, which is creating some short-term risks,” said Dirk Willer, managing director of emerging market strategy at Citigroup in New York.
Higher-risk assets, however, could take a hit if the Fed were to taper its stimulus by a larger-than-expected amount, such as $20 billion or more.
The dollar has also lost its safe-haven bid since Syrian President Bashar al-Assad agreed to give up his nation’s chemical weapons, averting a U.S. military strike, though the United States has not removed that option.
Additional reporting by Nick Olivari; Editing by James Dalgleish