* Fed minutes seen conveying eventual Fed tightening
* Euro potential gains capped by Greek debt issues (Adds quotes and graphics, updates prices, changes byline)
By Julie Haviv
NEW YORK, May 18 (Reuters) - The euro fell against the dollar on Wednesday as minutes from last month's U.S. central bank meeting raised expectations that inflation could spur an interest rate hike sooner than expected.
U.S. Federal Reserve policymakers discussed how to eventually normalize monetary policy at their April meeting. While policymakers did not make any decisions on their upcoming strategy, they did agree on principles to guide it. [ID:nN18276699]
Some Fed policymakers said they saw a rise in inflation risks, suggesting the Fed might need to tighten monetary policy sooner than currently anticipated.
"While we're not expecting any change in the immediate future, it's clear that the Fed is definitely eyeing an exit strategy from its extremely accommodative policy stance," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington.
"Ultimately, that suggests the dollar will eventually find some support as a result of rising interest rates later this year."
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For an instant view, see [ID:nN18180200]
For a graphic on the Fed's balance sheet, see:
http://link.reuters.com/buf92k
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
In afternoon New York trading, the euro was down 0.1 percent at $1.4226
The European Central Bank has already embarked on a path of monetary tightening, raising rates last month for the first time since July 2008.
The Fed's meeting, and a lack of new negative developments in Greece, prompted investors to turn their attention back to interest rate differentials, which have firmly favored the euro against the dollar this year. The single currency has gained about 6.4 percent year-to-date on the dollar.
GREECE REMAINS A WILD CARD
There were opposing views on whether Greece should overhaul its massive debt. Euro zone finance ministers on Tuesday floated the idea of a "soft" restructuring, but the Greek government did not appear keen to adopt their suggestion.
Greece's Finance Minister George Papaconstantinou said on Wednesday that no magic scenarios can take Greece out of its crisis. See [ID:nATH006083]
His comments pushed the euro lower earlier in the session, but the impact dissipated.
Some analysts argued that a restructuring in Greece would be unlikely at least until European officials are confident the contagion risks to other weak euro zone countries would be low.
Shaun Osborne, chief currency strategist at TD Securities, said the high $1.42 level is perhaps as good as it will get for the euro on Wednesday.
"We retain a broadly bearish bias and continue to think the main near- to medium-term risk is for a drop to the $1.36/$1.39 range," he said.
In line with euro weakness, the premium investors demand to hold Greek government bonds rather than benchmark German Bunds rose to one-week peaks on Wednesday.
The Greek/German 10-year government bond yield spread
Ongoing U.S. fiscal issues may limit demand for the U.S. dollar, which has bounced following a heavy selling trend this month, as investors trimmed overstretched bets to sell the greenback.
The dollar index <.DXY> rose 0.1 percent to 75.452, below a six-week high around 76.0 hit earlier in the week.
The dollar traded 0.2 percent lower against the yen at 81.56