October 30, 2013 / 4:36 PM / 4 years ago

FOREX-Dollar index drops ahead of Fed policy decision; upside seen

* Dollar index falls but positioning seen favoring dollar
    * Trade thin before afternoon Fed decision
    * Markets priced for Fed leaving stimulus intact until 2014
    * Euro up slightly after solid euro zone sentiment data

    By Julie Haviv
    NEW YORK, Oct 30 (Reuters) - The dollar edged lower against
a basket of major world currencies in thin trade on Wednesday as
investors refrained  from taking bold positions ahead of an
afternoon post-policy meeting statement from the Federal
    Expectations that the Fed will keep up its mammoth stimulus
of bond purchases well into next year has weakened the dollar
for well over a month, but many analysts believe it is poised
for a rebound. 
    "The dollar has sold off so much in recent weeks that the
bias is for a stronger dollar if the Fed is not overly dovish
this afternoon," said Omer Esiner, chief market analyst at
Commonwealth Foreign Exchange in Washington D.C.
    Currency speculators, who hold major sway over price action,
have recently piled on short positions, bearish trades that
profit when the dollar drops. 
    Those positions could unwind swiftly and send the dollar
higher should the Federal Open Market Committee, the Fed's
policy-setting arm, sound less downbeat than expectations when
it issues a statement after its policy meeting at 2 p.m. (1800
    The Fed is expected to maintain its $85 billion per month
bond-buying campaign when it concludes the two-day meeting. It
may point to softer readings on the U.S. economy to signal the
policy will be extended into 2014. 
    A majority of U.S. primary dealers polled by Reuters last
week said the Fed would not start cutting monthly bond purchases
until next March. 
    The dollar index, which tracks the greenback against six
currencies but is dominated by the euro, traded down 0.1 percent
at 79.518, below an eight-day peak of 79.692 earlier in
the global session but well above Friday's nine-month low of
    The index, which rose during the previous three sessions, is
down 0.8 percent in October. That follows a 2.3 percent drop in
    Earlier in the session, weak private sector jobs data
emboldened expectations that the Fed will keep the status quo on
its bond purchases well into next year.
    The ADP National Employment Report showed U.S. companies
hired 130,000 workers this month, below the 150,000 forecast by
economists polled by Reuters. 
    Meanwhile, data showing U.S. consumer prices rose modestly
in September but showed little sign of underlying inflation was
viewed as giving the Fed scope to maintain its monthly bond
    "With the Fed event risk people don't want to enter new
short positions," said Chris Turner, head of currency strategy
at ING.
    However, he said the dollar was likely to turn weaker after
the Fed announcement, potentially pushing the euro beyond its
recent highs, unless policymakers stressed the economic impact
of this month's U.S. government shutdown would be temporary.
    The euro, meanwhile, was boosted after data showed a jump in
euro zone sentiment in October, which offset figures revealing
an unexpected rise in the German jobless total. 
    The euro was last up 0.2 percent at $1.3764, having
backed off a 23-month peak of $1.3832 set on Friday. Traders
said the euro's failure to make a sustained break above $1.3800
left it vulnerable to a correction. 
    After gaining 2.3 percent in September the euro, according
to its latest prices, is up 1.8 percent in October. 
    Nevertheless, the euro remained supported by comments on
Tuesday by European Central Bank Governing Council member Ewald
Nowotny, who said he saw no tools the central bank could use to
dampen a strengthening euro. 
    Against the yen, the dollar was up 0.1 percent 98.24 yen
, having earlier hit a one-week high of 98.31 yen,
according to Reuters data.
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