FOREX-Dollar struggles as traders wary ahead of Fed meeting; NZD shines
* Dollar index struggles at one-month lows
* Markets twitchy ahead of Fed policy meeting next week
* Kiwi a standout performer after hawkish-sounding RBNZ
SYDNEY/TOKYO, July 26 (Reuters) - The dollar languished near one-month lows against a basket of major currencies on Friday, having suffered a setback overnight as traders were wary of the Federal Reserve turning more dovish at next week's policy meeting.
Setting the greenback on a slippery slope was a Wall Street Journal report that the Fed may debate changing its forward guidance to help hammer home its message that it will keep rates low for a long time to come, traders said.
"The article caused a stir, triggering another wave of unwinding in dollar long positions. The Fed's meeting had been seen as a non-event but now it is becoming a big focus," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.
The dollar index was slightly easier at 81.681, having slid more than 0.6 percent on Thursday to a low of 81.624, a level not seen since June 21.
The fall effectively terminated the greenback's tentative bounce on Wednesday and placed it back on a downtrend that started on July 10, when minutes of the Fed's June meeting gave investors second thoughts about when the bank would start reducing stimulus.
The next major support level is seen at 81.50, where it has its 200-day moving average as well as 76.4 percent retracement of its rally from June to early July. The rally was driven by expectations of an end in the Fed's quantitative easing.
Renewed pressure on the dollar saw the euro jump as far as $1.3296, a high last seen on June 20. It last stood at$1.3280, almost flat on the day.
Against the yen, the greenback shed 0.6 percent to 98.64, having touched a two-week low of 98.615 at one stage.
Having struggling to stay above strong support around 98.75, where it has its 90-day moving average as well as the top of Ichimoku cloud, the dollar is likely to head lower to test the July 11 low of 98.20.
The euro also lost a bit of ground on the Japanese currency, slipping 0.5 percent to 131.08 yen and pulling away from a two-month high around 132.74 set on Wednesday.
Traders agree that the dollar's near-term outlook hinges on the Fed's two-day policy meeting ending on Wednesday as well as the U.S. job data on Friday next week.
"It seems like the Fed is raising the bar on a future rate hike. For the moment, the dollar is likely to trade in its recent range until there is a clear signal from the Fed," said Katsunori Kitakura, associate general manager of market making unit at Sumitomo Mitsui Trust Bank in Tokyo.
Dollar bulls think the case for a firmer dollar in the third quarter still remained sound, given the Fed is expected to start tapering its asset-buying programme later this year, give or a take a few months.
Yet many of them were frustrated by the dollar's weakness in the past few weeks.
"I think a lot of people who had rushed to make dollar long position on the view that the dollar will strengthen towards the year-end has been forced to give up their bets. It's as if the market is suffering from nervous breakdown," said a trader at a European bank in Tokyo.
The New Zealand currency was a standout performer, having jumped 1.1 percent against the dollar on Thursday to $0.8105 , its highest in six weeks. It last traded at $0.8094, 0.4 percent above its late U.S. levels.
Investors warmed to the kiwi after the Reserve Bank of New Zealand surprised some on Thursday with a slightly hawkish statement, even as it pledged to keep the cash rate at a record low 2.5 percent through the end of the year.
The kiwi also hit its highest level in nearly five years against the Australian dollar, which slipped to as low as NZ$1.1388 on Thursday. The currency pair last traded at 1.1453, having fallen almost 10 percent from its March peak of 1.2681.