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Dollar off lows as Fed meeting looms; Aussie slips

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The dollar rose against a basket of currencies on Tuesday as investors, already persuaded the Federal Reserve will keep policy ultra-loose in the near term, trimmed bets against it.


The dollar index edged up slightly to 79.52. However, it remained not far off Friday's 78.998 - a low that hadn't been seen since Feb. 1.

(Read more: Should US be treatedlike an emerging market?)

A break there could pave the way for a test of this year's trough of 78.918 and then the September 2012 low of 78.601.

Traders said the market lacked conviction and moves were driven more by flows and position adjustments ahead of the Fed policy meeting on Tuesday and Wednesday than by fundamentals.

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Indeed, investors would probably have sold the dollar if they went only by the latest string of data, which suggested a flagging U.S. economy.

Figures on Tuesday showed U.S. manufacturing output barely rose in September and contracts to buy previously-owned homes recorded their largest drop in nearly 3-1/2 years.

(Read more: Data will be the key as Fed meeting starts)

"The dollar's ability to gain against this backdrop likely reflects positioning, with USD shorts having built up quickly in October according to our metrics," analysts at BNP Paribas wrote in a client note.

That has left the dollar increasingly less vulnerable to negative news and with more scope to rally if data begins to beat expectations again, they added.

Traders also said it is unlikely the dollar would react too negatively should the Fed choose to wait for more evidence of how badly Washington's budget battle hurt the U.S. economy before deciding on whether to reduce stimulus.

The dollar index has fallen about 1 percent this month, adding to a 2.3 percent slide in September.

One of the key beneficiaries of the dollar's decline has been the euro, which as recently as Friday hit its highest since November 2011 at $1.3833.

(Read more: Currency markets reach 'Europhoria' amid dollar dip)

The euro slipped 0.2 percent to stay under $1.38. Traders see chart resistance around $1.3800/70 with a convincing break there setting the scene for a retest of the October 2011 peak of $1.4248.

Sterling touched its lowest level in nearly two weeks due to stop-loss selling, traders said.

The pound eased 0.4 percent to under $1.61. It fell to $1.6063 earlier on Tuesday, its lowest level since Oct. 17.

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Against the yen, the dollar eased 0.1 percent, trading over 97 yen, but stayed above a two-week low of 96.94 yen set on Friday.

The U.S. jobs data for October, due on Nov. 8, may be a bigger key for the dollar's near-term outlook than this week's Fed meeting, said a trader for a European bank in Tokyo.

"If the jobs data is weak and leads to renewed dollar-selling, the dollar could drop to levels below 96.50 yen," the trader said.

The Australian dollar retreated after the head of Australia's central bank again tried to talk down the currency.

(Read more: China could cut short rally in Aussie dollar)

Reserve Bank of Australia Governor Glenn Stevens said it was likely the Aussie dollar would fall materially in the future given the country's declining terms of trade, a shift that would be welcomed by the country's exporters.

The Australian dollar fell 0.6 percent to $0.95. Last Wednesday, the Aussie hit $0.9758, its highest level since early June.

--By Reuters

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