* Speculation rises Fed may tweak its forward guidance on rates
* Dollar index hits lowest since June 20
* Investors await U.S. payrolls, ISM data next week
By Gertrude Chavez-Dreyfuss
NEW YORK, July 26 (Reuters) - The dollar slumped to a five-week low on Friday, falling for a third straight week on expectations the Federal Reserve will affirm at its monetary policy meeting next week that it intends to keep interest rates low for some time.
The Fed meets on Tuesday and Wednesday. A Wall Street Journal report suggested that the U.S. central bank may debate changing its forward guidance on rates to emphasize the fact that it will not be raising borrowing costs any time soon.
Analysts said this could keep the dollar on the defensive in the near term, but losses will likely be limited before a deluge of economic data releases next week, which include nonfarm payrolls for July and the Institute for Supply Management indexes for the manufacturing and service sectors.
“People got excited about Fed tapering in May and June and that has sort been priced in and now that yield support for the dollar has been eroded, positions on long dollars are being squeezed,” said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
He added that the Wall Street Journal article has added uncertainty to the Fed meeting next week, mainly as to whether it would stick to its initial guidance of a reduction in asset purchases by September.
The dollar index fell 0.4 percent to 81.638, having hit 81.548, its lowest since June 20 and just above chart support at 81.506, which is its 200-day moving average.
“Folks are just treading water. They just want to see the big numbers next week to get some directional guidance,” said Samarjit Shankar, director of market strategy at BNY Mellon in Boston.
The dollar resumed a slide that had begun on July 10 when minutes of the Fed’s June meeting gave investors second thoughts about when the bank would start reducing stimulus.
The euro rose to a five-week peak of $1.3296, helped by this week’s solid euro zone purchasing managers’ surveys. It was last flat on the day at $1.3281. Resistance is seen at the mid-June high of $1.3415.
Axel Merk, president and chief investment officer of Merk Investments, said the euro had the potential to rise to $1.40 this year and $1.50 next year because European Central Bank monetary policy was more restrictive than in the United States.
The euro is around 10 percent higher against the dollar since ECB President Mario Draghi vowed a year ago to do whatever it takes to save the single currency, calming investors’ fears about the euro zone breaking up.
The dollar, meanwhile, fell to a four-week low of 97.94 yen, according to Reuters data, and was last down 1.2 percent at 98.11 yen.
Despite Friday’s losses, analysts said the U.S. currency is expected to be well supported over the coming weeks on expectations the Fed may scale back bond purchases as early as September.
A survey on Friday showed U.S. consumer sentiment rose in July to its highest in six years as Americans felt better about the current economic climate, though they expected to see a slower rate of growth in the year ahead.
For the week, the euro gained about 0.9 percent against the dollar, its third straight week of gains. The dollar lost 2.3 percent against the yen, the worst week since mid-June.