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FOREX-Dlr broadly steady ahead of Fed; stg pressured

Published 08/12/2009, 07:30 AM
Updated 08/12/2009, 07:33 AM
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* Euro off 1-1/2 week low vs dlr, up slightly on day

* Sterling on back foot after dovish BoE inflation report

* Dollar index down 0.1 percent at 79.093

* FOMC decision at 1815 GMT awaited

(Recasts, updates prices, adds quotes)

By Ian Chua

LONDON, Aug 12 (Reuters) - The dollar slipped from a 1-1/2 week high against the euro on Wednesday and struggled versus the yen in a choppy session as investors kept a cautious footing ahead of the outcome of the Federal Reserve's policy meeting.

Global shares eased 0.2 percent, albeit well off early lows, while European government bond prices rose, indicating waning risk appetite ahead of the U.S. central bank's rate decision at 1815 GMT.

But sterling stayed under pressure after the Bank of England's quarterly inflation report suggested that markets were pricing in rate hikes too early.

"Choppy is the word ... everything is rangy but jumping in those ranges," said Stuart Bennett, senior forex strategist at Calyon in London, adding uncertainty about what the Fed might say was keeping markets directionless.

The euro fell to a 1-1/2 week low against the dollar at around $1.4087 before recovering to be up 0.2 percent on the day at $1.4165 by 1052 GMT, but the common currency was slightly lower against the yen at 135.75 yen.

The dollar also eased against the Japanese currency to 95.82 yen, after earlier reaching around 95.10, the lowest level this week. Against a basket of major currencies, the dollar was a touch weaker at 79.093.

There was little reaction to euro zone industrial production data, which unexpectedly fell 0.6 percent in June against forecasts of a 0.3 percent gain.

Meanwhile, sterling wallowed near a two-week low at $1.6391 following the Bank of England's quarterly Inflation Report.

The BoE said British inflation will be well below the 2 percent target in two years if interest rates were to be lifted in the first quarter, suggesting markets are too early in pricing in rate hikes.

"If you look at the Bank of England's projections mechanically, they'd appear to suggest no increase in rates for quite some time," said Philip Shaw, chief economist at Investec.

"In that respect the (market) reaction was quite understandable but it's very early to suggest that policy is going to remain on hold for a very long time given we've seen some strengthening in some of the key economic indicators."

Also on the back foot, the Australian dollar fell 0.7 percent against the U.S. dollar to $0.8241.

The Fed is expected to keep U.S. interest rates steady at near zero at a meeting that concludes on Wednesday, but the focus is on whether the central bank will end its programme of buying long-term government securities amid signs the economy is stabilising from a deep recession.

"The market is currently pricing in a 50 percent probability that the first rate hike will take place at the end of Jan. 10 and Fed comments pointing towards a later date could be short-term dollar negative," said analysts at Commerzbank.

Ahead of the Fed, Norway's central bank will make a rate announcement at 1200 GMT. Key interest rates are widely expected to remain at a record low 1.25 percent. (Additional reporting by Tamawa Desai; Editing by Victoria Main)

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