* Dollar index holds near six-month peak, euro eight-month trough
* FOMC, U.S. GDP & payrolls key tests for markets this week
* Euro zone inflation and China PMI also in focus (Updates prices, adds comments)
By Ian Chua and Masayuki Kitano
SYDNEY/SINGAPORE, July 29 (Reuters) - The dollar held steady near a six-month peak against a basket of major currencies on Tuesday, as investors kept to the sidelines ahead of a policy review by the Federal Reserve.
The Fed is sure to cut its monthly bond-buying programme by another $10 billion as it looks to wind up the scheme later in the year, but the focus for markets is on any clues to the timing of the first interest rate hike.
With other key data such as U.S. gross domestic product and the closely watched non-farm payrolls report still to come, investors were content to sit on their hands.
The dollar index, which measures the greenback’s value against a basket of major currencies, held steady at 81.029 . It had risen to 81.084 late last week, its highest level since early February.
The euro got a bit of respite after its recent drop, but still remained pinned near an eight-month trough of $1.3421 set on Friday. It last traded at $1.3435, little changed on the day.
“The euro’s fate will all be about the FOMC and then the nonfarm payrolls at the end of the week. I‘m looking for a $1.3400 to $1.3470 range until then,” said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore, referring to the Fed’s two-day policy meeting that starts on Tuesday.
In a sign of the increasingly bearish market sentiment toward the euro, data from a U.S. financial watchdog late last week showed that speculators increased their net short position in the euro to 88,823 contracts in the week to July 22, the most bearish positioning against the single currency since late November 2012.
The U.S. economy needs to do well in order for such euro-selling sentiment to persist, said Daisuke Karakama, chief market economist for Mizuho Bank in Tokyo.
“If bets accumulate too much in that direction though, you do have to be wary about the possibility of a sudden reversal,” Karakama said.
While the latest data on currency speculators’ positioning shows that euro-selling momentum has increased, it can also be seen as a sign that there is now more fuel for a short-covering bounce in the euro, Karakama added.
Against the yen, the euro held steady near 136.90 yen , staying above a low of 136.37 set on July 24, its lowest level since early February.
The dollar was flat versus the Japanese currency at 101.90 yen.
Besides the Fed policy meeting and U.S. jobs data, euro zone inflation and PMI surveys for China and the euro zone later this week are also on investors’ radar.
“Expect another day of hushed trading as the market continues to bide its time ahead of the mass data releases at the end of the week,” said Evan Lucas, strategist at IG in Melbourne.
The lack of volatility in currency markets has been a persistent feature for much of this year and the semi-annual reports on foreign exchange turnover appeared to highlight this trend.
In April, the average daily volume in total over-the-counter foreign exchange instruments in North America was 20 percent lower than a year ago, figures from the New York Foreign Exchange Committee showed. (Editing by Shri Navaratnam)