FOREX-Dollar falls to five-week lows in caution on Fed policy
* Speculation Fed may tweak its forward guidance on rates
* Dollar index hits 81.548, lowest since June 20
* Investors also await U.S. payrolls, ISM data next week
By Wanfeng Zhou
NEW YORK, July 26 (Reuters) - The dollar fell to a five-week low against major currencies on Friday on speculation the Federal Reserve will emphasize next week its intention to keep interest rates low for longer.
The Fed holds its two-day monetary policy meeting next Tuesday and Wednesday. A Wall Street Journal report suggested the U.S. central bank may debate changing its forward guidance on rates.
Analysts said this could keep the dollar on the defensive in the near term, but any losses could be limited before a deluge of economic data releases next week, which include nonfarm payrolls and the Institute for Supply Management indexes for manufacturing and services sectors.
"Folks are just treading water. They just want to see the big numbers next week to get some directional guidance," said Samarjit Shankar, director of market strategy at BNY Mellon in Boston.
The dollar index fell 0.4 percent to 81.681, having hit 81.548, its lowest since June 20 and just above chart support at 81.506 - its 200-day moving average.
The latest falls caused the dollar to resume a slide that began on July 10, when minutes of the Fed's June meeting gave investors second thoughts about when the bank would start reducing stimulus.
"We could see more squaring of long dollar positions keeping the downward pressure on the dollar ahead of the FOMC meeting next week," said Niels Christensen, currency strategist at Nordea in Copenhagen.
He said investors were still long of dollars, particularly against the yen and emerging market currencies.
The euro rose to a five-week peak of $1.3296, helped by this week's solid euro zone purchasing managers' surveys. It was last up 0.1 percent at $1.3290. More gains could see it target the mid-June high of $1.3415.
Axel Merk, president and chief investment officer of Merk Investments, said the euro had the potential to rise to $1.40 this year and $1.50 next year because European Central Bank monetary policy was more restrictive than in the United States.
The euro is around 10 percent higher against the dollar since ECB President Mario Draghi vowed a year ago to do "whatever it takes" to save the single currency, calming investors' fears about the euro zone breaking up. (Full Story)
The dollar fell to a four-week low of 97.98, according to Reuters data and was last down 1.3 percent at 98.05 yen.
Despite Friday's losses, analysts said the U.S. currency is expected to be well supported over the coming weeks on expectations the Fed may scale back bond purchases as early as September.
A survey on Friday showed U.S. consumer sentiment rose in July to the highest level in six years as Americans felt better about the current economic climate, though they expected to see a slower rate of growth in the year ahead.