U.S. dollar could weaken as Fed meeting looms

A picture illustration shows Japanese 10,000 yen notes featuring a portrait of Yukichi Fukuzawa, the founding father of modern Japan, taken in Tokyo August 2, 2011.

NEW YORK (Reuters) - The U.S. dollar could fall next week, especially against the Swiss franc and Japanese yen, as investors look to a Federal Reserve meeting for hints of further easing as worries about the global economy grow.

Stocks sold off and safe-haven assets, like the Swiss franc, soared this week after weak data fueled fears the world economy is slipping back into a recession. That sentiment persisted even after data Friday showed U.S. job growth accelerated more than expected last month.

The Swiss franc climbed to record highs against the dollar and euro on Friday, before easing back. The dollar last traded up 0.2 percent at 0.7665 franc, while the euro rose 1.5 percent at 1.0960 francs.

For the week, the dollar lost about 3.0 percent against the Swiss currency and the euro dropped 3.7 percent.

Against the yen, the dollar was last at 78.49, down 0.7 percent on the day, but rose 1.2 percent on the week after Japan intervened and eased monetary policy to weaken the yen.

Sharp moves in financial markets and the spike in volatility prompted aggressive policy actions by several major central banks in recent days, including a surprise interest rate cut by Switzerland, yen-selling intervention by Japan, and a resumption of bond buying by the European Central Bank.

"With markets already on the defensive and the macroeconomic picture deteriorating, (Fed Chairman Ben) Bernanke cannot afford to be tight-lipped about further quantitative easing," said Ashraf Laidi, CEO of Intermarket Strategy Ltd. in London.

"They have to continue signaling their readiness to introduce further measures, regardless of the Fed's opinion about the cost-benefit analysis of further quantitative easing," he added.

The U.S. Federal Open Market Committee, the Fed's policy-setting panel, is slated to announce its decision on interest rates at 2:15 p.m. EDT on Tuesday.

With no change in rates expected, investors will scrutinize the accompanying statement for the central bank's assessment on the economy and the outlook for monetary policy.

Any hints that the Fed could introduce news measures to stimulate a slowing economy could further erode the dollar's traditional role as a safe haven, driving investors to the Swiss franc and Japanese yen.

"Even if the Fed doesn't talk about QE3 next week, the market is going to continue to leave it as a possibility," said David Watt, senior currency strategist at RBC Capital Markets in Toronto. "The only thing can turn the U.S. dollar trend is we start seeing a string of upward surprises in U.S. economic data."

INTERVENTION WATCH

Japanese Finance Minister Yoshihiko Noda said he was closely watching yen moves on Friday, signaling a readiness to continue selling the currency.

"There is a good likelihood they will intervene again as they will want to make it clear to the markets that they will not be tested and they were not one-off interventions," said Andrew Cox, currency strategist at Citigroup in New York.

But with worries about a global economic slowdown, analysts doubted actions by central banks will spark a trend reversal.

The euro last traded up 1.3 at $1.4290 but was down slightly on the week. It got a boost after Italy's Prime Minister Silvio Berlusconi pledged on Friday to speed up austerity measures and bring the country's budget into balance by 2013.

Sources told Reuters the European Central Bank had demanded such measures in exchange for buying bonds to ease the pressure on Italy, which has come under market attack.

But Andrew Busch, senior currency strategist at BMO Capital Markets, said any positive sentiment would fade.

"Seriously, can the markets or the ECB trust Italian PM Berlusconi to put through reforms?" he said. "Remember, the Europeans have yet to implement their last rescue scheme for Greece and the ratings agencies are still likely to downgrade Italy and Spain."