* Dollar recovers from 6-month low versus euro
* FX volatility rises on uncertainty about Fed stimulus
* Analysts caution Fed minutes may disappoint
By Wanfeng Zhou
NEW YORK, Aug 21 (Reuters) - The dollar edged higher from a six-month low against the euro and gained versus the yen on Wednesday as traders bet Federal Reserve minutes due out later in the day will reinforce expectations of a pullback in stimulus next month.
The minutes of the Fed’s July meeting will be released at 2 p.m. (1800 GMT). Speculation that the U.S. central bank will begin reducing its $85 billion a month in asset purchases from September has underpinned the dollar while lifting Treasury yields to two-year highs.
“We expect today’s FOMC minutes to side in favor with a September tapering, as long as the data continues to unfold as expected, and to reiterate that interest rates are on hold for an extended period,” said Camilla Sutton, chief FX strategist at Scotia Bank in Toronto.
“We expect that this ultimately drives U.S. dollar strength on a broad basis.”
Analysts said the August nonfarm payrolls data, due on September 6, will be closely watched by investors and policymakers to determine whether the improvement in the labor market is enough to justify scaling back stimulus.
The euro was down 0.3 percent at $1.3380. On Tuesday, it reached as high as $1.3452, according to Reuters data, its highest since Feb. 14.
The dollar index, which measures the greenback versus a basket of six currencies, rose 0.3 percent to 81.121.
Gains in the dollar were limited as some analysts cautioned the Fed minutes may disappoint.
“If the Fed shows any concerns about low inflation or that they need to see a further improvement in the labor markets before tapering, it could send the dollar lower,” said Kasper Kirkegaard, FX strategist at Danske Bank.
But any moves lower in the dollar were unlikely to be drastic as investors have already begun unwinding their long dollar positions in recent weeks.
Growth-linked, commodity currencies extended their losses as global equity markets came under pressure. The Australian dollar was down 0.6 percent at $0.9020. The New Zealand dollar slid 1.1 percent to $0.7891.
In the options market, overnight implied volatility rose on growing uncertainty about the Fed’s stimulus. Demand to hedge against excessive price swings usually rises during times of financial uncertainty.
A gauge of overnight euro implied volatility spiked to around 10.6 on Wednesday from the previous session’s close of around 6.4, according to Thomson Reuters data.
Strategists said the euro’s further rise would be capped as the European Central Bank looks set on keeping interest rates at their current record low of 0.5 percent to support the economy.
“Even though we broke above the key level of $1.34 (yesterday), there was no strong follow through in the movement. That tells me there aren’t too many investors ready to put on euro longs against the dollar,” said Niels Christensen, FX strategist at Nordea.
The dollar rose 0.3 percent to 97.50 yen, edging away from a one-week low of 96.88 yen set on Tuesday, according to Reuters data.
The yen fell after Bank of Japan Governor Haruhiko Kuroda said he will not hesitate to provide further monetary stimulus if downside risks to the economy increased.
Analysts at Morgan Stanley said they maintain their bullish dollar/yen outlook and “consider pullbacks as providing buying opportunities.”
“The apparent change in tone by the BoJ’s Kuroda, suggesting that they would not hesitate to ease if downside risks increase, is likely to help put the yen back on its weakening trend.”