FOREX-Dollar on defensive ahead of Fed meeting; 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 and Hideyuki Sano
SYDNEY/TOKYO, July 26 (Reuters) - The dollar languished near 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 Journal 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 article caused a stir, triggering another wave of unwinding in dollar long positions. The Fed's meeting had been seen as a non-event but now it is becoming a big focus," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.
The dollar index was slightly easier at 81.681, 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.
The next major support level is seen at 81.50, where it has its 200-day moving average as well as 76.4 percent retracement of its rally from June to early July. The rally was driven by expectations of an end in the Fed's quantitative easing.
Renewed pressure on the dollar saw the euro jump as far as $1.3296, a high last seen on June 20. It last stood at $1.3280, almost flat on the day.
Against the yen, the greenback was down 0.4 percent from late U.S. levels at 98.84, having touched a two-week low of 98.75 at one stage.
For now, there are some bids near strong supports around 98.75, where it has its 90-day moving average as well as the top of Ichimoku cloud.
The euro also lost a bit of ground on the Japanese currency, slipping 0.4 percent to 131.32 yen and pulling away from a two-month high around 132.74 set on Wednesday.
Traders agree that the dollar's near-term outlook hinges on the Fed's two-day policy meeting ending on Wednesday as well as the U.S. job data on Friday next week.
"It seems like the Fed is raising the bar on a future rate hike. For the moment, the dollar is likely to trade in its recent range until there is a clear signal from the Fed," said Katsunori Kitakura, associate general manager of market making unit at Sumitomo Mitsui Trust Bank.
Analysts at BNP Paribas said the arguments for a firmer dollar in the third quarter still remained sound, especially as the Fed is expected to taper its asset-buying programme this year.
But they said in a report that the risk-reward is unattractive for new dollar longs heading into next week, and there would probably have to be some surprise from data and a shift in yield differentials in the dollar's favour for the currency to resume its upward momentum.
"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 BNP Parisbas report said.
The New Zealand currency was a standout performer, having jumped 1.1 percent against the dollar on Thursday to $0.8105 , its highest in six weeks. It last traded at $0.8094, 0.4 percent above its late U.S. levels.
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.
The kiwi also hit its highest level in nearly five years against the Australian dollar, which slipped to as low as NZ$1.1388 on Thursday. The currency pair last traded at 1.1453, having fallen almost 10 percent from its March peak of 1.2681.
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.