Euro touches then falls from 3-wk high vs. dollar; Fed ahead

   on April 25 2012 1:26 PM

(Reuters) - The euro pulled back from a three-week high against the dollar hit earlier on Wednesday as investors repositioned ahead of a policy statement from the Federal Reserve.

Most traders expect the Federal Reserve to restate its intention to keep rates near zero throughout 2014 and possibly hint at more easing, especially after recent weaker jobs data. Such comments could be positive for the single currency.

However, traders expected any gains in the euro on the Fed statement to be limited as the currency remained vulnerable to budget problems and political uncertainty in several euro zone countries.

Market participants will remain focused on any changes to the (Fed) statement, given that the Fed decision will have incorporated updated forecasts for inflation, employment and growth, said Eric Theoret, currency strategist at Scotiabank in Toronto. The press conference should see Fed Chair Bernanke remain cautious on the economic outlook given the moderate pace of growth, the elevated level of unemployment, and the fiscal uncertainties as we head toward year-end.

The euro rose as high as $1.3235, according to Reuters data, supported by relief as successful debt auctions on Tuesday sent yields on Dutch, Spanish and Italian bonds lower. But it last changed hands at $1.3184, down 0.1 percent, and just off the session low of $1.3179.

The Fed statement is scheduled for 12.30 p.m. EDT, with an accompanying news conference later on Wednesday.

Some analysts said a deviation from expectations with a more hawkish statement, pointing to improvements in the economy and dimming chances of more stimulus, could give the dollar a strong boost.

Developments coming out of the central bank may prop up the reserve currency should the committee continue to soften its dovish tone for monetary policy, said David Song, currency analyst at DailyFX.

STERLING FALLS

Sterling fell from a seven-month high against the dollar after data unexpectedly showed the UK economy slid into recession after contracting during the first quarter.

This curbed demand for the UK currency, which has attracted strong support recently as an alternative to the euro during heightened concerns about budget problems in Spain and other smaller euro zone economies.

Sterling was last down 0.1 percent at $1.6120.

The dollar, which earlier fell to a three-week low versus the Swiss franc before recovering to trade little changed at 0.9114 francs, was also little changed against the low-yielding Japanese yen to 81.38 yen, though it stayed above the previous session's one-week trough.

Analysts said the yen could come under pressure as market players position for a Bank of Japan meeting on Friday, when it is expected to increase asset purchases by up to 10 trillion yen ($123 billion).

(Reporting by Nick Olivari; Editing by Andrew Hay)

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