GLOBAL MARKETS-Dollar hits five-week low on Fed caution, Wall St sags
* Wall Street lower as profit-taking sets in * Gold falls with drop in dollar * Oil declines on worries over demand in China By Leah Schnurr NEW YORK, July 26 (Reuters) - The dollar fell to a five-week low on Friday on expectations the Federal Reserve will underline its intention to keep interest rates low for a long time at its upcoming policy meeting, while stocks fell as investors took profits from recent gains. The drop in the dollar pulled gold lower, though bullion was still on track for a third week of gains. But oil, which typically benefits from a weaker dollar, slipped on worries about falling demand in China, the world's second-largest energy consumer. The dollar has tumbled this month as Fed officials have moved to soothe concerns about plans to withdraw stimulus. A Wall Street Journal report published online on Thursday contributed to the greenback's latest fall. It said the Fed, which will begin a two-day policy meeting on Tuesday, may debate tweaking its forward guidance message to hammer home that it will not raise rates any time soon. The dollar was down 0.4 percent against a basket of currencies. The greenback earlier hit 81.548, its lowest since June 20 and just above chart support at 81.506, its 200-day moving average. In addition to the Fed's meeting, the market's tone next week could be determined by a round of U.S. economic indicators, culminating in the government's monthly report on non-farm payrolls on Friday. "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's slide began on July 10, when minutes of the Fed's June meeting gave investors second thoughts about when the U.S. central bank would start reducing stimulus. Last month the Fed said it expects to start slowing the pace of its $85 billion in monthly bond purchases later this year. Chairman Ben Bernanke has since stressed that the timeline is not set in stone and could change if the economic outlook shifts, comments that soothed Wall Street and the bond market. The dollar's weakness pushed the euro to a five-week high of $1.3296. But it erased gains to last trade at $1.3277, slightly lower on the day. U.S. stocks were lower in afternoon trading as investors took in a busy week of earnings results. Among the major companies to report, shares of Amazon.com were up 2.9 percent after earlier hitting a record. The company reported a second-quarter loss on Thursday but its domestic business expanded quickly. More than a half dozen investment banks raised their share price targets on Amazon on Friday. The Dow Jones industrial average was down 37.65 points, or 0.24 percent, at 15,517.96. The Standard & Poor's 500 Index was down 2.80 points, or 0.17 percent, at 1,687.45. The Nasdaq Composite Index was up 0.79 points, or 0.02 percent, at 3,605.98. With the S&P 500 up about 18 percent for the year, Friday provided an opportunity for modest profit-taking. For the week, the S&P is down about 0.4 percent, its first down week in five, but the index is up 4.9 percent so far this month, its best month since January. The Nasdaq is up 5.5 percent for July so far, its best monthly gain in a year and half. Six of the 10 S&P 500 industry sectors declined and 22 of the 30 Dow components were also down. . "Traders are booking in profits, knowing that next week you're going to have some significant data that could dictate a large move in all asset prices to the upside or downside," said Drew Nordlicht, managing director and partner at HighTower San Diego. "Next week couldn't be a more pivotal, economically packed week." The benchmark 10-year U.S. Treasury note was up 4/32, the yield at 2.5605 percent. The pan-regional FTSEurofirst 300 closed down 0.3 percent, its first weekly drop in over a month. World stocks slipped 0.2 percent. Nevertheless, it was a milestone day for Europe, marking one year since ECB President Mario Draghi's "Whatever it takes" speech that turned the tide in the euro zone debt crisis. Italy and Spain have seen their two-year bond yields fall from 5 and 6.4 percent, respectively, before Draghi's speech, to under 2 percent, saving them immense amounts in interest payments. Gold slipped but was still on course for a third weekly gain. Spot gold fell about 0.9 percent on the day to $1,321.69 per ounce as buyers cashed in on the day's $1,340 peak, up around $150 from the three-year low hit on June 28. Brent futures for September dropped 48 cents to $107.17 per barrel after posting a 46-cent gain on Thursday. U.S. light crude for September settled down 79 cents at $104.70 a barrel. Oil prices were dampened by worries over demand from China after China's industry ministry ordered companies across 19 industries to close outdated capacity by the end of September.