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FOREX-Fed taper views curb dollar momentum, China reforms favour risk

Hideyuki Sano
Monday, 18 Nov 2013 | 7:55 PM ET

* Dollar hemmed in by hopes Yellen-led Fed will keep easy stance

* Hawkish comments from Dudley raises tapering doubts

* Dollar index off 12-day low, still seen in downtrend

TOKYO, Nov 19 (Reuters) - The dollar was kept in check in early Asian trade on Tuesday, reflecting expectations that the Federal Reserve will keep its easy policy stance and on sharpened appetite for risk following Beijing's announcement of sweeping reforms.

The greenback kept some distance from Monday's 12-day low against a basket of currencies, however, following a drop in Wall Street shares from record highs late Monday and optimistic comments on the U.S. economy from Fed officials.

The dollar index stood at 80.729 , off Monday's low of 80.565, though a break above Monday's high of 80.923 is needed to break its downtrend in the past week.

The dollar has been under pressure from expectations that Janet Yellen, the Federal Reserve's chief in waiting, is likely to pursue an accommodative policy to support job growth.

The main focus is how long she intends to keep buying $85-billion of bonds every month, with many investors expecting the tapering of that programme to start in March rather than December.

Slightly denting that view, top Federal Reserve officials from opposite sides of the policy spectrum pointed on Monday to improvements in the U.S. economy .

William Dudley, president of the Federal Reserve Bank of New York and one of the staunchest supporters of the Fed's easy-money policies, cited labour market improvements and stronger-than-expected growth in the third quarter as signs of optimism for the U.S. economic recovery.

"Comments from Fed officials yesterday sounded a bit hawkish. To assess where the consensus is at the Fed, the Fed's policy minutes tomorrow will be important," said Shinichiro Kadota, chief FX strategist at Barclays.

As the dollar lacked momentum, the euro stood at $1.3503 , after having hit a 12-day high of $1.3542 on Monday, extending its recovery after a sharp drop to two-month low of $1.3295 on Nov 7 in the wake of the European Central Bank's surprise rate cut earlier this month.

The euro and other risk currencies benefited from a global rally in shares reflecting optimism for China's reform plans, which boosted China's CSI300 Index 3.3 percent on Monday, its biggest one-day rise in two months.

The dollar, which tends to outperform the yen when risk appetite is strong, also failed to extend its recent rally to a two-month high against the Japanese currency.

The dollar traded at 99.94 yen, almost flat on the day but off two-month peak of 100.435 hit on Thursday, with traders reporting a thick layer of offers at its September high around 100.60.