FOREX-Dollar drifting, awaiting US rate clarity

SYDNEY, April 29 (Reuters) - The U.S. dollar was a shade softer in Asian trading on Tuesday, with investors wary ahead of a Federal Reserve meeting and a welter of major economic data which could well decide the medium-term outlook for U.S. rates.

The euro edged up to $1.5653 <EUR=>, from $1.5637 in New York late on Monday, while the dollar was off 0.22 percent against a basket of currencies at 72.548 .DXY.

It was steady on the yen at 104.13 yen <JPY=> with turnover very light as the Tokyo market was shut for a holiday. Dealers were also holding their breath for Wednesday's outcome of the Fed's two-day policy meeting.

Speculation is high the U.S. central bank will trim its funds rate by a slim 25 basis points to 2.0 percent and signal a desire to hold rates there for the time being (for more, click on [nFEDAHEAD]). Such an outcome could support the U.S. dollar, though traders noted that the market had already moved to price it in by buying the dollar back late last week. Fed fund futures were implying 2.0 percent would be the floor for rates, and had even moved to price in the first hikes late in 2008. Some analysts, however, thought talk of future tightening was premature given this week's data on growth, consumption, manufacturing and payrolls were likely to show the U.S. economy was still deteriorating.

"Profit-taking on the U.S. dollar's rally into the end of last week has been the dominant theme," wrote analysts at Westpac in a note to clients.

"Fed pricing is still consistent with a final 25 basis point rate cut this week, followed by hikes later in the year-- a view that is likely to be sorely tested as U.S. economic data continues to turn out weak."

In particular there was a risk the gross domestic product report on Wednesday could show the economy actually shrank in the first quarter. Some economists were looking for Friday's payrolls report to show a much bigger drop than the 80,000 median forecast.

For their part, European policy makers continue to sound more concerned about inflation than euro zone economic growth. On Monday, both European Central Bank President Jean-Claude Trichet and Governing Council member Yves Mersch said risks to price stability remained on the upside [ID:nL28200056].

Their comments suggested the ECB is not ready to start cutting interest rates from 4 percent soon, even with regional data pointing to an inflation slowdown in four German states for April [ID:nL28897580]. (Reporting by Wayne Cole; Editing by Jonathan Standing)