FOREX-Dollar struggles as market focus turns to Fed minutes
* Wednesday's Fed minutes to shed light on U.S. tapering plans * Dollar index stays above recent seven-week low * Rising U.S. bond yields provided some support By Anooja Debnath LONDON, Aug 19 (Reuters) - The dollar struggled on Monday as investors held back before Federal Reserve minutes this week that are likely to set a course for the currency depending on how they affect the outlook for the Fed's stimulus programme. The dollar index was down about 0.1 percent at 81.257, remaining well above a near two-month low of 80.868 plumbed on August 8. It failed to draw strength from U.S. 10-year Treasury yields, which hit two-year highs of 2.8750 percent. Higher U.S. yields make dollar-denominated assets attractive. But the impact on the currency has been blunted by improvements in the euro zone and UK economies that have underpinned the euro and sterling. The Fed publishes the minutes of its July 30-31 meeting on Wednesday. Uncertainty over what they will say about the pace and timing of the central bank's plans to trim its bond-buying programme put a damper on the U.S. currency. "The minutes could point to the Fed tapering stimulus next month. This, coupled with rising U.S. Treasury yields, could lead to some dollar strength this week," said Marcus Hettinger, global FX strategist at Credit Suisse. Some strategists, however, cautioned that if the Fed sounded dovish or failed to provide clues on its tapering plans the dollar could falter. "The consensus is for the tapering process to begin next month. But if the minutes don't give any strong hints of that, there is a risk expectations start to drift from September to October," said Adam Cole, global head of FX strategy at RBC Capital Markets. "This gives the dollar a slight negative bias, although it is not an aggressive call." Against the dollar, the euro was up 0.2 percent at $1.3356, within sight of the $1.3401 it reached on August 8, which was its highest since June 19. Analysts said euro zone manufacturing and services activity data due on Thursday could help the euro. Latest Commodity Futures Trading Commission data showed that currency speculators were bullish on the euro for the second straight week which ended on August 13. Against the yen, the dollar edged up 0.5 percent to 98.03 yen. Traders reported a large options expiry at 98.00 yen. Chartists said if the dollar could break above the August 15 peak of 98.66 yen it could retest the August high of 99.955 yen. While U.S Treasury yields have risen more than 10 basis points from last Friday's low to Monday's high, Japanese government bond (JGB) yields have inched up by only around 2.0 bps. This U.S.-Japan bond spread "continues to widen in favour of dollar/yen upside," strategists at UBS said. "We look for more spread widening over the months ahead, as the Fed begins the process of QE3 tapering while the Bank of Japan continues to lean heavily on the JGB curve."