FOREX-U.S. dollar subdued as low inflation alters Fed calculus
* USD down broadly as markets position for easy Fed
* Commodity currencies such as AUD among best performers
* Euro seen capped by expectations of ECB rate cut
By Ian Chua
SYDNEY, April 30 (Reuters) - The dollar wallowed at 1-1/2 week lows against a basket of currencies in early Asian trade on Tuesday as declining bond yields and slowing inflation put pressure on the Federal Reserve for more action.
Undermining the dollar was a slide in the two-year Treasury yield to a nine-month trough of 0.21 percent as low readings on inflation led some market players to bet on more stimulus from major central banks.
The dollar index last traded at 82.151, having shed more than 0.4 percent to a low of 82.035, a level not seen since April 17.
The greenback fell hard against higher-yielding commodity currencies such as the Australian dollar, which rose to a two-week high near $1.0360. Immediate resistance is seen at the session peak, a level representing the 38.2 percent retracement level of its April 11-23 slide.
The Fed kicks off its two-day meeting later in the day and markets are watching to see if a sluggish economic recovery and a slowdown in inflation could not only end talk of tapering bond buying but actually push the central bank into buying more.
"Given the underlying inflation trends, we believe attention should shift to the potential for further accommodation, which may involve increasing the monthly pace of purchases, holding securities for longer or modifying the forward guidance," analysts at Barclays Capital wrote in a note.
The Fed is currently buying $85 billion of debt a month and the talk had been of when it might start to scale back. However, a string of soft data have changed the conversation.
Against the yen, the dollar was steady at 97.98, after a brief dip to a two-week low of 97.35. Trading in dollar/yen was subdued on Monday given a holiday in Japan.
Japanese data out Tuesday was uniformly firmer than expected with a notable jump in household spending suggesting consumers were reacting to the Bank of Japan's pledge to end deflation.
The greenback also lost ground on the euro, which reached $1.3094, up from last week's trough of $1.2954. But it was still some way off this month's peak around $1.3200, a level that is likely to provide strong resistance.
Further gains for the euro may be limited as the European Central Bank (ECB) is expected to cut interest rates at its policy meeting on Thursday.
Markets will be keeping a close eye on German consumer sentiment, retail sales and employment data due later on Tuesday. German inflation data on Monday has already surprised on the downside.
With much of the euro area already mired in recession, fresh evidence of weakness in Europe's largest economy may well force the ECB to cut its 0.75 percent refi-rate to a new all-time low.