Dollar soft as Fed meets, data in focus

A woman displays euro and U.S. dollar notes at foreign currency exchange counter in Hanoi October 11, 2009.

SYDNEY (Reuters) - The dollar was subdued on Tuesday, pulling away from recent two-month highs against the euro, with markets wary about what the U.S. Federal Reserve would signal after its two-day policy meeting.

High-yielding currencies retained broad gains against the U.S. dollar and the Japanese yen after Dubai got a $10 billion lifeline from Abu Dhabi. That eased some of the concerns about potential debt defaults that had driven investors to the safety of the U.S. dollar and the yen in recent sessions.

The Federal Reserve starts its two-day meet on Tuesday and is likely to keep rates unchanged near zero. But all eyes are on the accompanying statement, especially after upbeat sales and jobs data led markets to price in chances of a rate hike in the middle of 2010.

A slew of U.S. data is scheduled to be released on Tuesday, including industrial production for November, the NAHB housing index for December and producer prices for November. ECONUS

The dollar index .DXY was down at 76.359, off a 6-week high of 76.726 struck late last week, with analysts expecting it to fall if the Fed reiterates a dovish bias and doesn't fully acknowledge the recent run of strong data.

"Though the dollar index has broken the 55-day moving average, now around 75.71, and has had more good than bad sessions of late, it continues to face headwinds," said David Watt, senior currency strategist at RBC Capital Markets.

"If the Fed highlights exit strategies, watch the topside in the dollar index. If they highlight the 'extended period' of low rates, watch the 55-day moving average."

For most of the year, investors sold dollars on signs on signs of U.S. growth because they have been betting that U.S. interest rates would still stay low well into 2010, making other currencies and higher-yielding assets like stocks more attractive.

The euro held on to broad gains in early Asian trade trading $1.4650, and climbed on the yen to 129.90 yen as risk trades got a fillip from the Dubai bailout.

The U.S. dollar was also a shade firmer against the yen at 88.69 yen, having lost ground in the previous session helped by talk of Japanese yen repatriation and selling by exporters.

Meanwhile, the Australian dollar was holding above $0.9150, having jumped more than 0.5 percent on Monday.

Investors are awaiting minutes of the Reserve Bank of Australia's (RBA) December policy meeting when it raised rates 25 basis points to 3.75 percent and said this third hike was a material adjustment to policy.

While the RBA rarely gives any forward guidance on policy, traders will scour the minutes for any thing hawkish which could in turn help the Aussie further.

(Editing by Wayne Cole)