Mon Nov 2, 2009 7:00pm EST
* USD subdued, Aussie higher ahead of RBA rate decision
* A 25 bps hike priced in, might need more to lift Aussie
* Fed starts two-day meeting, outlook uncertain
By Anirban Nag
SYDNEY, Nov 3 (Reuters) - The U.S. dollar and the yen eased on Tuesday, while the Australian dollar extended gains ahead of a central bank meeting where interest rates are widely expected to be lifted by a quarter of a percentage point.
Trading is expected to be light with a market holiday in Japan. Dealers expect currencies to consolidate after recent volatile moves and ahead of event risks in the form of major central bank meetings which kick off on Tuesday.
The U.S. Federal Reserve starts its two-day meeting on Tuesday and, while it is expected to keep rates unchanged, there is speculation that it might drop or alter its pledge to keep rates low for an "extended period".[nFEDAHEAD].
"We do not expect that to happen, so the dollar should resume its trend downwards to the end of this year," said John Horner, foreign exchange strategist at Deutsche Bank in Sydney.
The dollar index .DXY was down 0.12 percent at 76.207, off a high of 74.411. The euro EUR= inched up to $1.4775, having gained 0.35 percent on Monday, while against the yen it rose to 133.57 yen EURJPY=R, from 133.34 yen.
The yen slipped against the dollar, easing to 90.40 per dollar JPY=, from around 90.30 yen late on Monday.
Both the U.S. dollar and the yen tend to get sold off when optimism about a global recovery gains ground with investors, who then move funds to riskier assets like stocks and high-yielding currencies.
The Australian dollar AUD=D4 rose to $0.9050, from around $0.9033 late on Monday, in expectation of the Reserve Bank of Australia (RBA) would raises rates by a quarter of a percentage point to 3.5 percent later in the session.
Indeed, so well priced in is such a move that it might take something larger to push the Aussie any higher.
"We could see a modest sell off if the RBA moves by 25 basis points and sticks to its earlier language of phasing out the stimulus is a gradual manner," Horner said.
"That would mean a December rate hike is not given thing and any such move would be data dependent."
Dealers said lingering fears about the banking sector, triggered by a Federal Reserve official's comments [ID:nN02443852] and some caution ahead of the U.S. non-farm payrolls data are likely to underpin both the dollar and the yen and check gains in high-yielders.
(Editing by Wayne Cole)