* Moves in dollar seen driven by position adjustment
* Speculators turn short dollar for first time since mid-February
* Dollar extends gains after array of U.S. data
* Aussie hurt as RBA chief talks down the currency
NEW YORK, Oct 29 (Reuters) - The dollar climbed for a third straight session against a basket of major currencies on Tuesday as investors, convinced the Federal Reserve will keep U.S. monetary policy ultra-loose well into next year, trimmed bearish bets against it.
The greenback's gains were largely driven by position adjustments For month-end and before the Fed's two-day policy meeting starting on Tuesday. Many have sold the dollar in recent weeks, suggesting that if the Fed stands pat on monetary policy, as widely expected, investors would opt to buy the dollar back.
The Federal Open Market Committee, the Fed's policy-making arm, is expected to keep the monthly $85 billion bond purchasing program in place until at least next March, according to a recent Reuters poll.
Indeed, currency speculators went short or bet against the dollar in the latest week for the first time since mid-February, according to data from the Commodity Futures Trading Commission released on Monday and Reuters calculation.
The dollar index, which tracks the greenback against six currencies but is dominated by the euro, last traded 0.3 percent higher at 79.492 after earlier hitting a peak of 79.530, its strongest level in a week.
Nevertheless, the dollar index remained within striking distance of Friday's 78.998, its lowest since February.
"Investors are expecting a dovish tone from the Fed and that is more or less priced in. There is a lightening of positions before the Fed, but volumes are low - at least 20-30 percent lower than usual," said Alvin Tan, currency strategist at Societe Generale.
Traders said it was unlikely the dollar would be adversely hit 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 slightly extended gains after economic data gauging U.S. retail sales, inflation and home prices.
A gauge of consumer spending rose in September as Americans likely snapped up Apple's new iPhone and bought leisure goods, but falling sales of automobiles pointed to sluggish economic growth during the third quarter.
U.S. producer prices unexpectedly fell in September and the increase in the annual rate was the smallest in nearly four years, pointing to a benign inflation environment.
Meanwhile, U.S. single-family home prices rose in August and also posted their strongest annual gain in more than seven years, a closely watched survey showed on Tuesday.
Against the yen, the dollar last traded at 97.98 yen, up 0.3 percent on the day.
One beneficiary of the dollar's recent decline has been the euro, which hit a two-year high of $1.3833 on Friday.
The euro last traded at $1.3770, down 0.1 percent, with investors wary the European Central Bank may express discomfort with the single currency's strength in coming weeks.
"One gets the feeling speaking to clients that moves in the euro and expectations that the Fed will be dovish have gone too far," said Manuel Oliveri, FX strategist at Credit Agricole. "To that extent, we think the dollar's downside is limited."
Meanwhile, the Australian dollar retreated after Reserve Bank of Australia Governor Glenn Stevens tried to talk it down.
It last traded 0.8 percent lower at $0.9492, down smartly from a four-month high of $0.9758 touched last Wednesday.
"I don't disagree with the Governor and can easily imagine Aussie/dollar at 0.80 in a couple of years' time," said Kit Juckes, foreign exchange strategist at Societe Generale. "But I don't think, sadly, that there will be much follow-through from today's move and I still want to sell Aussie/dollar much closer to parity, much closer to the end of the year."