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FOREX-Dollar lower vs euro before Fed statement

Published 08/12/2009, 12:05 PM
Updated 08/12/2009, 12:09 PM
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* Euro off 1-1/2 week low vs dlr, last up on the day

* Stg recovers from dovish BoE inflation report

* FOMC decision at 1815 GMT awaited

* Little impact from U.S. trade data on FX markets (Adds comment, details, updates prices)

By Nick Olivari

NEW YORK, Aug 12 (Reuters) - The dollar slipped from a 1-1/2 week high against the euro on Wednesday with investors cautious ahead of the Federal Reserve's policy statement due later in the session.

The focus on the Fed overshadowed a U.S. Commerce Department report that indicated the U.S. trade deficit widened in June to $27.0 billion, as goods imports increased for the first time in 11 months on higher oil prices.

Sterling recovered from the session lows and stayed under pressure after the Bank of England's quarterly inflation report suggested that markets were pricing in rate hikes too early.

"The currency market will at least look for the Fed to sound a bit more optimistic on the state of the U.S. economy, though most eyes will likely be searching for comments on the monetary policy stance with regards to the future of quantitative easing," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto.

"While a great deal of uncertainty has been introduced by the Bank of England's actions to expand their QE program, the U.S. dollar would likely suffer should the Fed signal movement in the same direction as dollar bulls would actually be hoping for a signal that the program would not be extended in September," Tihanyi said.

The euro fell to a 1-1/2 week low against the dollar at around $1.4087 before recovering to trade up 0.4 percent on the day at $1.4208 midway through the New York session. The euro was 0.7 percent higher against the yen at 136.71 yen.

"The U.S. dollar is getting hit as the market adjusts positions ahead of the FOMC meeting," said Marc Chandler, senior currency strategist at Brown Brothers Harriman. A Federal Open Market Committee statement is expected about 2:15 p.m. (1815 GMT).

The dollar rose against the Japanese currency to 96.22 yen after earlier reaching the lowest level this week. Against a basket of major currencies, the dollar fell 0.1 percent to 79.103.

Sterling reversed early losses and rose 0.3 percent to $1.6537 after the Bank of England's quarterly inflation report though it was more dollar weakness than pound strength.

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 London.

"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."

The Australian dollar rose 0.3 percent against the U.S. dollar to $0.8319.

The Fed is expected to keep U.S. interest rates steady at near zero, but the focus is on whether the central bank will end its program of buying long-term government securities amid signs the economy is stabilizing 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.

Norway's central bank held its main interest rate unchanged at a record low of 1.25 percent on Wednesday, in line with analyst forecasts as the Norwegian economy has shown signs of stabilisation.

The dollar was 1.7 percent lower against the Norwegian crown, while the euro fell 1.6 percent against the Norwegian currency. (Additional reporting by Ian Chua in London; Editing by Kenneth Barry)

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