FOREX-Dollar on the defensive after setback; NZD in vogue
* Dollar index struggles at one-month lows
* Markets twitchy ahead of Fed policy meeting next week
* Kiwi a standout performer after hawkish-sounding RBNZ
By Ian Chua
SYDNEY, July 26 (Reuters) - The dollar languished at one-month lows against a basket of major currencies on Friday, having suffered a setback overnight as investors turned cautious ahead of next week's Federal Reserve policy meeting.
Setting the greenback on a slippery slope was a Wall Street report that the Fed may debate changing its forward guidance to help hammer home its message that it will keep rates low for a long time to come, traders said.
The report helped knock the benchmark Treasury yield off a near two-week high of 2.634 percent, a move that also undermined the greenback.
The dollar index stood at 81.791, having slid more than 0.6 percent on Thursday to a low of 81.624, a level not seen since June 21.
The fall effectively terminated the greenback's tentative bounce on Wednesday and placed it back on a downtrend that started on July 10, when minutes of the Fed's June meeting gave investors second thoughts about when the bank would start reducing stimulus.
Renewed pressure on the dollar saw the euro jump as far as $1.3296, a high last seen on June 20. Against the yen, the greenback was down at 99.27 having touched a two-week low of 98.87.
The euro also lost a bit of ground on the Japanese currency, slipping to 131.80 and pulling away from a two-month high around 132.74 set on Wednesday.
Analysts at BNP Paribas said the arguments for a firmer USD in the third quarter still remained sound, especially as the Fed is expected to taper its asset-buying programme this year.
But they said the risk-reward is not attractive for new USD longs heading into next week.
"A resumption in USD upside momentum probably requires a shift in relative data surprise as well as yield differentials moving back in the USD's favour," they wrote in a report.
"Friday's data calendar is limited to final Michigan sentiment for July, which we expect to be revised a bit lower from the preliminary reading of 83.9, with the measure continuing to slowly retrace the big spike higher from May."
The New Zealand currency was a standout performer overnight, jumping 1.1 percent on the greenback to $0.8105, its highest in six weeks. It last traded at $0.8065.
Investors warmed to the kiwi after the Reserve Bank of New Zealand surprised some on Thursday with a slightly hawkish statement, even as it pledged to keep the cash rate at a record low 2.5 percent through the end of the year.
Data out of Japan on Friday showed core consumer prices turned positive and rose 0.4 percent in June from a year earlier, marking the fastest pace of increase in nearly five years.
The outcome was in line with expectations and suggested the government's efforts to end years of deflation are bearing fruit.