Profits taken as focus shifts to Bernanke

Investors took profits on gains in stocks and commodities this week while buying back the U.S. dollar on Friday, but kept the currency close to a 10-month low ahead of a speech by the head of the Federal Reserve.The dollar steadied after overnight plumbing a low for the year against major currencies, having dropped 7 percent since September on expectations the Fed will soon have to flood the banking system with freshly printed cash to support the economy.An indication that Fed Chairman Ben Bernanke is getting closer to this decision and perhaps considering other measures such as inflation or even gross domestic product targeting would probably unleash more dollar selling and buying of emerging market equities, commodities and longer-term bonds.With bets against the dollar significantly high, the risk of a bounce is appreciable.”We are concerned that the market is short dollar based on a deep expectation that the Fed Chairman will hint strongly at an aggressive QE program,” Steven Englander, head of G10 foreign exchange stratgy at Citi, said in a note.”While we do not see the Fed as having an incentive to disappoint the FX or bond markets, it would be easy for hesitation to do damage at this stage.”The euro slipped 0.2 percent to $1.4048 after hitting the highest since January on Thursday around $1.4121.

The U.S. dollar index .DXY, a gauge of performance against six other major currencies, was largely unchanged on the day after dropping to the lowest since December 2009.Focus on the dollar’s decline has become intense, causing political consternation and financial upheaval. Investors have been busy aligning their strategies with the way other asset markets have reacted to the weak dollar.

The Reuters-Jefferies CRB index .CRB and the MSCI all-country world equities index .MIWD00000PUS have a 0.9 inverse correlation with the dollar index on a 90-day basis, meaning basically stocks and commodities have been moving in the opposite direction of the dollar.After hitting the highest since July 2008 on Thursday, copper traded on the London Metal Exchange slipped 0.1 percent to $8,388 a ton, though was still set for a fourth straight month of gains.Gold inched up 0.2 percent to $1,379.45 an ounce, but could slide back to around $1,365 if profit taking hit the metal. Still, the near-term target according to chart analysts is $1,404, which could be reached early next week.

In equities, Japan’s Nikkei share average fell 0.7 percent .N225, hurt by weakness among banking shares. Despite a 2 percent gain on Thursday, the index continues to underperform other Asian markets this month.The MSCI index of Asia Pacific stocks outside Japan slipped 0.5 percent .MIAPJ0000PUS, with declines evenly spread across the sectors after hitting the highest since June 2008 in the prior session.Having some of the biggest developing economies in the world, Asia has been sucking in portfolio investment from abroad at a rapid pace. In general, emerging market equity funds have absorbed more than $60 billion in net inflows this year, $23.3 billion of which has come since the beginning of September, fund tracker EPFR Global said in a note –  Reuters