Dollar bides time as Fed meeting looms, Aussie off lows
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SYDNEY (Reuters) - The U.S. dollar loitered in familiar territory early on Tuesday with investors reluctant to do much as they waited for fresh guidance on interest rates from the Federal Reserve, while the Australian dollar rebounded from a six-month trough.
The dollar index was little changed at 84.252, largely consolidating in a slim 84.035-84.519 range since its rally to a 14-month peak on Sept. 9 ran out of steam.
The euro traded at $1.2938, also hemmed in a $1.2859-$1.2980 range after a selloff sparked by the European Central Bank's interest rate cut early this month faded.
But keeping pressure on the ECB, the OECD on Monday urged much more aggressive stimulus to ward off the risk of deflation in a subdued euro zone.
In contrast, markets have been positioning for the Fed to signal an earlier hike in rates than investors had been expecting following its Sept. 16-17 policy meeting.
That has seen the 10-year Treasury yield post its biggest rally in over a year last week. In turn, the higher yields have bolstered the appeal of the greenback, particularly against the low-yielding yen.
The greenback peaked at a six-year high of 107.39 yen on Friday and remained within striking distance at 107.20 on Tuesday.
The benchmark yield hit a two-month high of 2.651 percent overnight, but ended lower at 2.591 percent after data showed U.S. manufacturing output fell for the first time in seven months in August.
Still, the underlying trend remained consistent with a steadily recovering U.S. economy and should reinforce market expectations for a slightly more hawkish signal from the Fed.
Specifically, investors are looking for the Fed to drop its promise to keep rates near zero for a "considerable time" after it ends its bond-buying program later in the year.
"At Wednesday's FOMC meeting, changes to Fed forecasts and wording that reflects expectations that rates could go higher sooner than expected should provide support to the U.S. dollar," analysts at Barclays wrote in a note to clients.
The broad rally in the greenback and a pick up in implied volatility have undermined the Australian dollar, which has dropped 4 U.S. cents in the past week.
It was last at $0.9029, not far from a six-month trough of $0.8984 plumbed on Monday.
Traders said that low should provide some support for now as it coincided with the 61.8 percent retracement level of its rally from $0.8660 in January to $0.9505 in July.
The Aussie's rebound came as iron ore prices bounced off a five-year low, probably spurred by expectations that Beijing will be forced to inject more stimulus after recent data confirmed a slowdown in the economy.
The recent drop in the Aussie should be very welcomed by the Reserve Bank of Australia (RBA), which is counting on a weaker currency to help bolster the export sector.
RBA Assistant Governor of Economics, Christopher Kent, could comment on the currency's slide in a speech this morning.
Minutes of the RBA's Sept. 2 meeting are also due, but they are unlikely to shed any new light on the latest thinking at the central bank.
Later in the day, Bank of Japan Governor Haruhiko Kuroda is scheduled to speak at a meeting with business leaders in Osaka.
Sterling remained on edge ahead of Thursday's historic referendum on independence for Scotland. It traded at $1.6223, having last week fallen to a 10-month low of $1.6052.
(Editing by Shri Navaratnam)