By Tommy Wilkes
LONDON (Reuters) - The New Zealand dollar fell on Wednesday after weak jobs data heightened expectations interest rates would fall, as investors waited for the end of the Federal Reserve's two-day policy meeting.
Trading was thin with holidays in much of Asia and Europe. Most currency pairs traded within tight ranges.
The Fed meeting comes after strong U.S. economic data last month pushed the dollar to a two-year high.
"The risk for this Fed meeting is that, unless the FOMC meets the market’s dovish expectation for their stance, we would expect another leg higher in USD," Mizuho strategists said in a note.
The dollar, measured against a basket of currencies, slipped in London trading, with the index at 97.381.
The euro gained against the dollar to $1.1234, its highest since April 23. Strong economic data in the euro zone on Tuesday prompted some short covering from hedge funds that have been betting against the single currency.
The day's big mover was the New Zealand dollar. It fell half a percent after data showed employment unexpectedly fell in the March quarter, although the jobless rate dropped to 4.2 percent.
Markets responded by betting a rate cut was more likely. The Reserve Bank of New Zealand, which holds a policy meeting next week, has already said its next move was likely to be down.
The kiwi recovered from earlier lows and was last down 0.2 percent at $0.6663.
The Australian dollar gained 0.1 percent to $0.7059.
Accommodative monetary policy throughout much of the world has kept volatility contained across financial markets and demand for riskier assets elevated.
"Currencies benefiting from strong global growth combined with low inflation pressures have caught a bid," Morgan Stanley (NYSE:MS) analysts said, listing the pound and the Indian rupee as both countries are dependent on capital inflows to fund their current account deficits.
Sterling extended its rally to hit a new two-week high, supported by growing optimism that the ruling Conservative and opposition Labour parties can break the Brexit deadlock in their negotiations over how to leave the European Union.
The pound rose 0.3 percent to $1.3074, leaving it up 1.8 percent so far this week. The Bank of England holds its policy meeting on Thursday, where it is expected to keep rates unchanged.
The Japanese yen strengthened 0.1 percent to 111.35 yen per dollar in quiet trading. Japanese markets are closed for a string of public holidays.