FOREX-Dollar index drops ahead of Fed policy decision; upside seen
* Dollar index falls but positioning seen favoring dollar * Trade thin before afternoon Fed decision * Markets priced for Fed leaving stimulus intact until 2014 * Euro up slightly after solid euro zone sentiment data By Julie Haviv NEW YORK, Oct 30 (Reuters) - The dollar edged lower against a basket of major world currencies in thin trade on Wednesday as investors refrained from taking bold positions ahead of an afternoon post-policy meeting statement from the Federal Reserve. Expectations that the Fed will keep up its mammoth stimulus of bond purchases well into next year has weakened the dollar for well over a month, but many analysts believe it is poised for a rebound. "The dollar has sold off so much in recent weeks that the bias is for a stronger dollar if the Fed is not overly dovish this afternoon," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington D.C. Currency speculators, who hold major sway over price action, have recently piled on short positions, bearish trades that profit when the dollar drops. Those positions could unwind swiftly and send the dollar higher should the Federal Open Market Committee, the Fed's policy-setting arm, sound less downbeat than expectations when it issues a statement after its policy meeting at 2 p.m. (1800 GMT). The Fed is expected to maintain its $85 billion per month bond-buying campaign when it concludes the two-day meeting. It may point to softer readings on the U.S. economy to signal the policy will be extended into 2014. A majority of U.S. primary dealers polled by Reuters last week said the Fed would not start cutting monthly bond purchases until next March. The dollar index, which tracks the greenback against six currencies but is dominated by the euro, traded down 0.1 percent at 79.518, below an eight-day peak of 79.692 earlier in the global session but well above Friday's nine-month low of 78.998. The index, which rose during the previous three sessions, is down 0.8 percent in October. That follows a 2.3 percent drop in September, Earlier in the session, weak private sector jobs data emboldened expectations that the Fed will keep the status quo on its bond purchases well into next year. The ADP National Employment Report showed U.S. companies hired 130,000 workers this month, below the 150,000 forecast by economists polled by Reuters. Meanwhile, data showing U.S. consumer prices rose modestly in September but showed little sign of underlying inflation was viewed as giving the Fed scope to maintain its monthly bond purchases. "With the Fed event risk people don't want to enter new short positions," said Chris Turner, head of currency strategy at ING. However, he said the dollar was likely to turn weaker after the Fed announcement, potentially pushing the euro beyond its recent highs, unless policymakers stressed the economic impact of this month's U.S. government shutdown would be temporary. The euro, meanwhile, was boosted after data showed a jump in euro zone sentiment in October, which offset figures revealing an unexpected rise in the German jobless total. The euro was last up 0.2 percent at $1.3764, having backed off a 23-month peak of $1.3832 set on Friday. Traders said the euro's failure to make a sustained break above $1.3800 left it vulnerable to a correction. After gaining 2.3 percent in September the euro, according to its latest prices, is up 1.8 percent in October. Nevertheless, the euro remained supported by comments on Tuesday by European Central Bank Governing Council member Ewald Nowotny, who said he saw no tools the central bank could use to dampen a strengthening euro. Against the yen, the dollar was up 0.1 percent 98.24 yen , having earlier hit a one-week high of 98.31 yen, according to Reuters data.