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Monday October 27, 2014 - 23:44:01 GMT
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FOREX-Dollar struggles as Fed meeting looms, market subdued

6:51pm EDT

* Dollar broadly softer, retreats from near three-week high vs yen

* All eyes on Fed policy meeting outcome due mid-week

* Fed seen sticking to dovish script as it winds up QE stimulus

By Ian Chua

SYDNEY, Oct 28 (Reuters) - The U.S. dollar nursed modest losses early on Tuesday, having slipped broadly in a sluggish session overnight on expectations of more dovish comments from the Federal Reserve.

The greenback eased to 107.83 yen, retreating from Monday's near three-week peak of 108.38. It also ceded a bit of ground against the euro, which last traded at $1.2698 off Monday's low of $1.2665.

The common currency had risen as high as $1.2723, but failed to break through resistance around $1.2727, a level representing the 50 percent retracement of its Oct 21-23 fall from $1.2841 to $1.2614.

The Australian dollar popped above 88 U.S. cents again , but remained well within its prevailing $0.8640-$0.8900 range following September's 6.3 percent drop.

Data on Monday showed U.S. services sector activity slowed in October to a six-month low, while manufacturing output in Texas dipped, pointing to some moderation in economic growth early in the fourth quarter.

The soft data reinforced expectations that the Fed will reassure markets that any interest rate hikes are a long way off even as it ends its massive bond-buying stimulus.

The Fed kicks off its policy review later on Tuesday and is all but certain to announce the completion of its quantitative easing program when it wraps up its two-day meeting.

"Trade overnight had a very distinctive feeling of 'wait and see'," said Evan Lucas, market strategist at IG.

"With the end of the asset purchase program a foregone conclusion, speculation is once again mounting about the movement of interest rates."

But with U.S. inflation weak, the European economy stumbling and the dollar on the rise, markets are keen to see if Fed officials will acknowledge risks to their expectations that the U.S. recovery will continue to strengthen.

Highlighting some of that risks, a closely watched report showed German business sentiment in October hit its lowest level in almost two years, suggesting Europe's largest economy could be in for a bumpy ride in the fourth quarter.

Figures showing the ECB spent a mere 1.704 billion euros last week on buying covered bonds also threw up questions on the effectiveness of its new program to foster lending to businesses and thereby supporting the euro zone economy.

If the ECB continues its covered bond purchases at the same rate as in the first week of the new program, it will be many years before it gets to its 600-billion-euro target.

ECB sources said the plan to buy private sector assets may fall short of its goal and pressure is likely to build for bolder action early next year, with government bond purchases an option.

Asia and Europe have little to offer in terms of market-moving economic data on Tuesday, leaving the focus on U.S. durable goods data due later in the day. (Editing by David Gregorio)

Thomson Reuters 2014. All rights reserved


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