March 18, 2019 / 8:56 AM / a month ago

FOREX-Aussie leads recovery as hopes for accommodative Fed knock the dollar

* U.S. dollar falls ahead of Fed meeting

* Commodity-linked currencies stage strong recovery

* Sterling slips as PM May battles to rescue her deal

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, March 18 (Reuters) - The Australian dollar hit a two-week high and led a recovery against the U.S. currency on Monday as caution about the U.S. economy and expectations for an accommodative Federal Reserve meeting this week kept the greenback on the back foot.

The euro was also a beneficiary from the weaker dollar, adding 0.2 percent to $1.1347.

Markets are expecting the Fed to strike a dovish tone when it meets this week, and bets for an interest rate cut have risen after weaker-than-expected manufacturing data on Friday. U.S. bond yields fell to 10-week lows.

The U.S. currency, measured against a basket of rivals, fell 0.2 percent to 96.408.

The Aussie was the biggest gainer from the greenback’s pullback. The Australian currency added 0.5 percent to $0.7119 AUD-D3, a two-week high.

The New Zealand and Canadian dollar also performed well.

“The market is probably expecting some down-shift in the ‘dot plots’ (which currently see two hikes in 2019 and one in 2020), plus some more discussion on the end of quantitative tightening - i.e. stopping its balance sheet reduction. This should maintain a positive environment for risk,” ING analysts said.

“While we do think the dollar can hold its own against the low-yielders ... the current low volatility environment plus decreasing headwinds should be positive for high yield and EM FX in general.”

The Japanese yen was little moved at 111.52 yen, off Friday’s nine-day high of 111.90.

Sterling slipped back to $1.3278 but was not far from last week’s nine-month high of $1.3380, supported by relief that a no-deal Brexit could be averted and an extension to Britain’s departure from the European Union requested.

Prime Minister Theresa May is trying to convince lawmakers to back her twice-rejected Brexit withdrawal deal in a possible vote in the British parliament this week, although two government ministers said on Sunday there might not be a vote unless they can be sure of getting the deal approved.

May could hold a third vote on her agreement on Tuesday or Wednesday. Commerzbank analysts said a vote on Tuesday “would constitute a signal that she considers it possible that her deal will be accepted.

“Admittedly, her views were wrong so often in the past that that would not necessarily constitute a strong GBP positive signal, but it should no doubt have a moderately positive effect on the British currency.” (Additional reporting by Hideyuki Sano in Tokyo; Editing by Alison Williams)

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