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Dollar inches up on Fed "tapering" prospect, Aussie slides

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The dollar edged higher on Tuesday, recovering from recent falls, on caution that the Federal Reserve may lay the groundwork for curbing stimulus at a policy meeting this week.

The dollar index, which measures the dollar's value against a basket of currencies, was up 0.1 percent at 81.724, pulling away from Monday's five-week low of 81.499 and holding above chart support at 81.524, the 200-day moving average.

(Read more: Changes to Fed 'forward guidance' could bring volatility back)

The dollar has retreated over the past few weeks since Federal Reserve Chairman Ben Bernanke stressed a highly accommodative monetary policy was still necessary.

But analysts said traders were wary of selling the dollar heavily due to expectations the Fed will scale back monetary stimulus in the coming months. The U.S. central bank concludes a two-day policy meeting on Wednesday.

"The market may have got ahead of itself in expecting a soft FOMC statement," said Arne Lohmann Rasmussen, head of currency research at Danske Bank in Copenhagen.

The dollar has also come under selling pressure after a media report last week said the Fed may tweak forward guidance to stress that interest rates will stay low for a long time.

Rasmussen said such comments from the Fed could weigh on the dollar, possibly pushing the euro up towards $1.3350, but he recommended using any pullbacks to buy back the U.S. currency.

(Read more: Aussie back to doing its job as 'shock absorber')

The euro was steady at $1.3266, just below Friday's five-week high of $1.32975 and chart resistance at $1.3300.

The European Central Bank and the Bank of England are expected to maintain pledges to keep monetary policy loose after policy meetings ending on Thursday.

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Analysts at Barclays recommended investors reinitiate short euro/dollar positions, with a target of $1.28 and a stop at $1.3430.

"The broader dollar strengthening trend remains very much alive." They said firmer U.S. private sector activity data, which may come when U.S. monthly jobs figures are released on Friday, could lead to a stronger dollar.

The dollar was up 0.3 percent at 98.19 yen.

(Read more: Why Bernanke's 'open mouth' operations beats policy moves)

Aussie, Swedish crown fall

The Australian dollar slid 1.5 percent on the day to $0.9064 - just above a near three-year low of $0.8998 hit in mid-July - after Reserve Bank of Australia Governor Glenn Stevens said the currency could fall further and there was room for more interest rate cuts.

The Swedish crown also lost ground after data showed the Swedish economy unexpectedly contracted by 0.1 percent during the second quarter of the year, helping the euro rise 0.6 percent to 8.6412 crowns.

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