* Dollar index steady, not very far from Monday's 4-week low
* Focus on Fed's 2-day policy meeting that starts Tuesday
* Market expects Fed to announce modest tapering of stimulus
By Masayuki Kitano and Hideyuki Sano
SINGAPORE/TOKYO, Sept 17 The dollar wallowed
near a four-week low on Tuesday as traders waited with bated
breath for the outcome of the Federal Reserve's two-day policy
meeting at which it's expected to announce a modest reduction in
its bond-buying stimulus.
The dollar was little changed versus a basket of currencies
at 81.312, after having set a four-week low of 80.968 the
The greenback had retreated on Monday after Lawrence
Summers' withdrawal from the race to lead the Federal Reserve
reduced expectations of a faster pace of monetary policy
tightening by the U.S. central bank.
The decision by the former U.S. Treasury secretary - who is
regarded by investors as relatively hawkish - left Federal
Reserve Vice Chair Janet Yellen as the front-runner. Traders
said the Fed is likely to continue a slow, cautious approach to
tightening policy if Yellen is named to replace current Chairman
That had added to pressure versus the dollar, which has
struggled recently as disappointing economic data led to market
expectations that the Fed would reduce its $85 billion monthly
bond-buying stimulus by only a modest $10 billion after its
two-day policy meeting starting on Tuesday.
Still, with the Fed looking set to take its first, albeit
small, step to wind back its stimulus, investors will be
focusing on the Fed's guidance on its future policy stance.
"On top of the size of tapering, what's more important this
time is the Fed's forecast of interest rates in 2016, which will
give markets an idea on the pace of future rate hikes," said Sho
Aoyama, senior market analyst at Mizuho Securities.
Analysts say rate hike expectations hold the key because of
their impact on short-term U.S. bond yields and thereby the
dollar's yield attraction.
A faster pace of rate increases would make the dollar more
attractive given that many other central banks, such as the
European Central Bank and the Bank of Japan, are perceived to be
nowhere near tightening.
"Lots to look for, and there are so many possible
combinations, it's hard to predict in advance," said Gareth
Berry, Singapore-based G10 FX strategist for UBS, referring to
how the dollar might react to the Fed's policy meeting.
"But by and large, there should be enough...to convince
people that we're at the early stages of a multi-year U.S.
dollar broad-based advance," Berry said.
The euro held steady near $1.3333, staying below a
near three-week high of $1.3385 set on Monday.
Against the yen, the dollar rose 0.2 percent to 99.27 yen
, having bounced back from Monday's two-week low of 98.45
"It seems like there's fairly firm support around 98.40. I
don't expect the dollar to fall sharply below that level," said
a trader at a Japanese bank.
The British pound hovered near an eight-month high hit on
Monday as it drew support from a string of solid UK economic
data in recent weeks.
The pound held steady at $1.5895, after having
risen to $1.5963 on Monday, its highest since January.