Dollar lower vs euro and yen after Fed minutes

NEW YORK (Reuters) - The dollar declined against the euro on Tuesday, after earlier hitting a two-week high, as traders stepped in to buy back the common currency at cheaper levels on expectations of further dollar weakness.

That arrested a two-day dollar rally, sparked by a growing view that last week's better-than-expected employment data would keep the Federal Reserve from cutting interest rates later this month.

The euro slipped as low as $1.4016 on Tuesday, well off a record high near $1.43 hit last week, before bouncing back.

The dollar briefly pared losses before falling again after the release of the minutes of the Federal Reserve's September meeting, which indicated the central bank still has some inflation concerns.

"There have been a lot of discussions about downside risks to the economy, and if inflation continues to stay contained or fall, it will give the Fed room to ease policy further," said Sophia Drossos, senior currency strategist at Morgan Stanley in New York. "And as long as the Fed is in easing mode, the dollar is likely to suffer."

Late afternoon in New York, the euro was up 0.4 percent at $1.4108, near session highs. Earlier, it slipped to $1.4016, its lowest level since September 20, according to Reuters data. The dollar slipped 0.3 percent against the yen to 117.14.

The Fed cut rates by half a percentage point in September to shield the economy from worsening housing and credit crises, but the jobs report sparked greater expectations that the central bank may stick to the sidelines when it next meets to consider rates on October 31.

Futures markets now see about a 34 percent chance of a Fed rate cut this month, down from around 75 percent last Thursday, the day before the jobs report.

The minutes did cause some volatility in afternoon trade, specifically mentioning inflation risks could be heightened if the dollar were to continue to depreciate significantly.

But separately, Federal Reserve Bank of St. Louis President William Poole said on Tuesday that the depreciation of the U.S. dollar is something that is not explicable.

Strategists said Poole's comments hurt the greenback.

"Poole's tone sounds pretty relaxed about the dollar's depreciation," said one New York strategist. "It's almost as if he's saying it's no big deal. He doesn't sound alarmed."

Also buffeting the euro in recent days have been complaints from European officials who fear the currency's rise against the dollar threatens to undermine the euro-zone economy.

That has led markets to brace for finance officials from the Group of Seven richest countries to call for a stronger dollar when they meet next week in Washington.

"Seeing finance ministers pile on and complain about the strong euro has caused some people who were long euros at the currency's all-time high to rethink their strategy, at least ahead of the meeting," said Andy Busch, global currency strategist at BMO Capital Markets in Chicago.

But on Monday, euro-zone finance ministers ended a meeting by calling on China to let the yuan appreciate to help solve exchange rate imbalances, echoing the U.S. position.

"That might be a bit of a reason why we've seen the euro come back a bit, as they talked about the yuan and refrained from saying too much on the dollar," McCarthy said.

He added there is still "an incredible and ongoing appetite for euros that doesn't have much interest in short-term trends."

Greg Salvaggio, senior currency trader at Tempus Consulting in Washington, said traders are likely to buy the euro on dips with the view of taking the currency back near its record high just shy of $1.43 touched last week.

(Additional reporting by Vivianne Rodrigues)