FOREX-Caution before Fed decision weighs on dollar

Wed Jul 31, 2013 5:12am EDT

Related Topics

* Dollar index edges towards 5-week low

* Caution before Fed decision and U.S. GDP, ADP data

* Aussie and Swedish crown extend Tuesday's falls

By Jessica Mortimer

LONDON, July 31 (Reuters) - Caution before a Federal Reserve policy statement which may hint at when stimulus will be scaled back but could also push back expectations for when interest rates will rise pushed the dollar lower on Wednesday.

The U.S. currency has been sold in recent weeks on bets that the Fed would seek to reassure markets that rates would stay low for a long time.

While the Fed is expected to keep buying $85 billion of bonds a month, the dollar's direction is likely to be set by how markets interpret the central bank's post-meeting statement.

Some in markets speculate the Fed could adjust the economic thresholds it has laid out to guide expectations of when interest rates will rise, which analysts said would hurt the dollar.

However, the dollar would benefit if the statement focuses on plans to "taper" asset purchases.

"The market might be expecting something too dovish from the Fed and this could give the dollar some support," said Paul Robson, currency strategist at RBS, adding that month-end flows may also drive currency direction on Wednesday.

The statement is due at 1800 GMT but, unlike after the last policy meeting, Chairman Ben Bernanke will not hold a news conference to give any further guidance.

The dollar index, which tracks the dollar against a basket of major currencies, was down 0.1 percent at 81.720. It hit a five-week low of 81.499 on Monday.

Before the statement, focus will be on U.S. gross domestic product data at 1230 GMT and ADP private payrolls at 1215 GMT, which are important because the Fed has suggested the pace and timing of stimulus reduction will depend on data.

Gareth Berry, G10 FX strategist for UBS in Singapore, said the dollar's reaction to the Fed's post-meeting statement may be limited as the Fed will probably keep its options open on when it starts to taper bond buying.

The euro was up 0.15 percent at $1.3283, lifted by data showing an unexpected fall in German unemployment which edged it towards a six-week high of $1.33025 hit on Tuesday.

The dollar eased 0.2 percent to 97.84 yen, nearing a one-month low of 97.635 yen set on Monday.

AUSSIE FALLS FURTHER

The Australian dollar hit a three-year low of A$1.4716 per euro, extending Tuesday's falls after comments from the head of the central bank were seen as increasing the chances of a rate cut next week. It also fell 0.3 percent against the U.S. dollar to $0.9031.

The Swedish crown fell further after weak growth data on Tuesday was seen increasing the chances of a rate cut. The euro hit a two-week high of 8.7185 crowns.

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