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FOREX-Dollar index weakens, Fed view may accelerate selloff

Anirban Nag
Monday, 28 Oct 2013 | 4:49 AM ET

* Euro trades slightly below 2-year high against dollar

* Fed meeting could fuel more dollar selling

* Dollar/yen edges up, rate differentials underpin pair

LONDON, Oct 28 (Reuters) - The dollar fell towards a nine-month low against a basket of currencies on Monday, with more investors selling on growing confidence the Federal Reserve will keep policy accommodative.

The Federal Reserve starts its two-day policy meeting on Tuesday and is widely expected to keep its bond-buying stimulus unchanged at $85 billion per month. Most expect the central bank to delay withdrawing stimulus until March 2014.

The dollar index was at 79.176, not far from a near nine-month low of 78.998 touched on Friday. The longer the Fed keeps policy accommodative, the more U.S. yields stay anchored, making the dollar less attractive to hold.

The dollar's weakness saw the euro trade up at $1.3815 , having risen to $1.3833 on Friday, its highest since November 2011 on trading platform EBS.

Investors are a bit wary of pushing the euro much higher, worried that policymakers from the European Central Bank may try to talk down the currency in coming days.

Speculation that ECB policymakers may step in verbally has gained pace especially after recent economic data, including German business confidence and purchasing managers' index surveys, highlighted the fragile economic recovery.

"Eurozone policymaker concern is probably the biggest restraint for a euro/dollar that looks technically mobile toward the $1.3980/4000 area," said Tom Levinson, currency strategist at ING. "The dollar index looks primed for a test of support in the 78.60/90 area in coming days."

Most expect the Fed to express concerns about the economy, especially after the 16-day government shutdown that has hurt economic growth and hit business confidence. With arch-dove Janet Yellen set to takeover from Chairman Ben Bernanke, despite senator Rand Paul's threats to put on hold her nomination, the dollar is set to struggle in coming months.

"There's every likelihood that we'll see the Fed communicate a willingness to delay before they taper," said Gareth Berry, Singapore-based G10 FX strategist for UBS, referring to the Fed's meeting this week.

"That would confirm market expectations and would probably lead to an extension of this dollar weakness."

While the dollar is likely to struggle against the euro and the British pound, it is likely to gain ground against the yen.

The dollar rose 0.2 percent to 97.60 yen, edging away from a more than two-week low of 96.94 yen hit on Friday.

The dollar was supported on the view that yield differentials between Japanese government bonds and U.S. Treasuries will persist, as the Fed eventually moves toward tapering while the Bank of Japan keeps its ultra-easy stance.

The BOJ is widely expected to maintain its monetary policy stimulus at its policy review on Thursday to meet its target of two percent inflation in two years.