FOREX-Dollar slips to near two-week low on Fed outlook

Wed Sep 11, 2013 3:50pm EDT

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* Yen hits 3-1/2-month low vs euro

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* Fed meeting in focus as markets await stimulus trim

NEW YORK, Sept 11 (Reuters) - The dollar fell to near two-week lows against major currencies on Wednesday as some investors pared bets on a reduction in stimulus by the Federal Reserve when it meets next week.

The yen rebounded against the dollar but remained close to a seven-week low struck earlier. The yen hit a 3-1/2-month trough versus the euro and a four-year low against sterling as easing tensions over Syria dented demand for the safe-haven currency.

Traders said uncertainty about Syria and the Fed could keep major currencies in a range. The Federal Open Market Committee meets next Tuesday and Wednesday and doubts about a scaleback in stimulus have risen following Friday's disappointing jobs data.

"I don't think there's a whole lot of room before Wednesday's FOMC, but I do think there's going to be a little bit of pressure on the dollar heading into that as more traders take bets off of the likelihood of Fed taper," said Andrew Dilz, foreign currency trader at Tempus Inc in Washington.

The dollar index, a measure of the greenback versus six major currencies, slipped 0.4 percent to 81.493, having hit a low of 81.445, the weakest since Aug. 29.

The euro rose 0.4 percent to $1.3313. The dollar fell 0.5 percent to 99.85 yen, after touching a session peak of 100.60 yen, according to Reuters data, which was the strongest since July 22.

Lower U.S. Treasury yields contributed to pressure on the dollar, analysts said.

"It is a combination of things," said Paul Robson, currency strategist at RBS Global Banking. "Tensions in Syria, which had been negative for risk assets and supported the yen, have eased a bit. Also global economic data over the last couple of weeks has been relatively good."

President Barack Obama pledged on Tuesday to explore a diplomatic plan from Russia to take away Syria's chemical weapons, although he voiced skepticism and urged Americans to support his threat to use force if needed.

A string of solid data out of China this week reinforced expectations that the world's No. 2 economy is stabilizing after more than two years of slowing growth.

The euro was down 0.2 percent at 132.93 yen, having hit an intraday peak of 133.36, its highest since May 22.

Better-than-expected economic data and improving market sentiment has helped the euro zone single currency lately, but analysts at Morgan Stanley warned the euro's strength could be short-lived and they remain sellers on any rallies.

"A break above the August high of (around) $1.3450 is unlikely, and we would look to sell around the $1.3320 level," they wrote to clients.

Sterling was last up 0.5 percent to $1.5823, above $1.58 for the first time since February, as the UK jobless rate dropped, supporting bets that interest rates could be tightened by the end of next year.

"British pound optimism has been warranted in recent weeks as nearly every single economic data print since late May has meshed with the notion that the Bank of England would remain steady on its monetary policy course and move towards normalizing stimulus," said Christopher Vecchio, currency analyst at DailyFX in New York.

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