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Dollar edges higher as markets await Fed decision

Sean Gallup | Getty Images

The dollar drifted higher on Tuesday, trading in narrow ranges, as investors continued to adjust positions ahead of this week's key decision on bond-buying by the U.S. Federal Reserve.

The U.S. currency ended last week slightly lower against a basket of major currencies and investors are buying back the greenback this week to square up positions, analysts said.

(Read more: Cramer: Could Fed send stocks tumbling lower?)

As the Fed begins its two-day policy-meeting on Tuesday, market participants generally expect no major policy changes, though the U.S. central bank could begin to lay the groundwork for a reduction in its economic stimulus that could occur in the first quarter of the year.

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In midday trading, the dollar index was up 0.1 percent at 80.137. It is down about 0.7 percent over the last three weeks.

Against the yen, the dollar was down for a third straight session, falling 0.4 percent to 102.63.

The euro, which reached a six-week high against the dollar last week, slipped 0.1 percent to $1.3749, shrugging off an upbeat German sentiment survey that followed a strong German PMI report on Monday.

The chances of the Fed starting to taper its huge bond-buying program this month or next have increased after a run of upbeat data, including strong November industrial production, although a majority of economists polled by Reuters still expect the change to come in March.

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