FOREX-Dollar index rises for 3rd day as Fed meets; euro edges up
* Moves in dollar seen driven by position adjustment
* Comments made by ECB's Nowotny buoy euro
* Dollar holds gains after U.S. consumer confidence falls sharply
* 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 the world's most actively traded currencies on Tuesday as investors, convinced the Federal Reserve will keep U.S. monetary policy ultra-loose well into next year, trimmed bearish bets.
The dollar index, which tracks the greenback against six currencies but is dominated by the euro, last traded 0.1 percent higher at 79.308 as Fed policymakers started a two-day meeting. The index was below the session's earlier one-week peak of 79.535 but above Friday's 78.998, which marked its lowest since February.
The greenback erased gains against the euro in mid-morning New York trade after European Central Bank Governing Council member Ewald Nowotny told MNI that he saw no tool the central bank could use against a strong euro.
The single currency has climbed more than 8 percent against the dollar since early July.
"The ECB's Nowotny reduced expectations of a rate cut in December and the beginning of next year and while he is known to be a hawk, the foreign exchange market is desperate for trends right now," said Sebastien Galy, foreign exchange strategist at Societe Generale in New York.
"Whenever the market sees an open door, people jump for it," he said.
The euro rose as high as $1.3813 after the ECB's Nowotny's comments, not far from last week's two-year peak of $1.3832.
It last traded at $1.3792, up 0.1 percent, with investors remaining wary the ECB may express discomfort with the single currency's strength in the 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."
Position adjustments for month-end as the Fed's two-day policy meeting got under way boosted the greenback. 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.
Should the Fed sound less dovish or provide a hint at to when it may curb its asset-purchase program, the dollar should notch gains as participants could scramble to cover bets that profit on the dollar depreciating.
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.
"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 held firm despite a report showing U.S. consumer confidence fell sharply in October.
U.S. business inventories rose as expected in August, suggesting restocking could provide a lift to third-quarter economic growth.
Those reports followed a slew of 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 in 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 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 97.94 yen, up 0.3 percent on the day.
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 $0.9494 , down from last Wednesday's $0.9758, a four-month high, according to Reuters data.