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FOREX-Dollar hovers near 1-year low ahead of Fed meeting

Published 09/23/2009, 09:12 AM
Updated 09/23/2009, 09:18 AM
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* Dollar index near 1-year low as Fed statement awaited

* New Zealand dollar surges on growth surprises

* BoE minutes show no plans to increase asset buying

* Trading cautious as G20 summit looms (Updates prices, adds details, changes byline, dateline, previous LONDON)

By Steven C. Johnson

NEW YORK, Sept 23 (Reuters) - The dollar hovered near a one-year low against a basket of major currencies on Wednesday as investors braced for the close of a Federal Reserve meeting that's expected to keep U.S. interest rates at a record low.

Dealers were on alert, though, for signs that the Fed may curtail some of the programs that over the last year have injected trillions of dollars into the troubled banking system, and that was keeping exchange rate moves somewhat subdued.

News on Tuesday from other central banks suggested some policymakers are at least thinking about exit strategies from the ultra-loose monetary policies that have reigned of late.

Sterling gained as minutes from the last Bank of England meeting showed officials did not press to increase asset purchases, which some traders feared they would, while the Norwegian crown rallied after the Norges Bank left interest rates on hold but said it considered raising them.

"The Fed will acknowledge improvement in the economy but should keep the outlook very much the same, with interest rates staying low for an extended period," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"But there's always the risk they may say more about exit strategies than the market is anticipating, so I think people want to wait until this is out of the way."

Any such hints could squeeze investors with short dollar positions and lead to a greenback rally, Strauss said.

The dollar index, which measures the dollar's value against a basket of six other major currencies, was marginally higher at 76.139, off an earlier low of 75.892, a level not seen since last September.

The euro pulled back a bit from a one-year high above $1.48 and was flat at $1.4783 while sterling rose 0.4 percent to $1.6424 and the dollar rose 0.2 percent to 91.30 yen.

The dollar fell 1 percent against the Norwegian crown to 5.7830 after the Norges Bank hinted at possible rate hikes down the road.

The New Zealand dollar hit a 13-month high after data showed the economy unexpectedly exited recession in the second quarter. It was last up 0.8 percent at $0.7244.

Traders were also keeping an eye on a Group of 20 leaders' summit, which begins on Thursday and is expected to call for economic stimulus plans to stay in place, a move which could give a boost to riskier assets.

Ian Stannard, currency strategist at BNP Paribas in London, said any retreat in commodity-linked currencies in the run-up to the Fed and G20 would provide a buying opportunity.

The dollar has shed more than 2.5 percent this month as speculators sold the dollar on rising confidence in a global recovery and expectations U.S. policymakers will keep benchmark rates at rock-bottom levels for some time.

Speculation that the G20 would focus on rebalancing the global economy, a process that almost certainly calls for a weaker dollar, also hit the U.S. currency on Tuesday.

But Citigroup strategists said the exchange rate adjustment that requires the dollar to weaken and the currencies of high surplus countries such as Japan and emerging markets such as China to appreciate has been going on for some time.

Instead, they said G20 efforts are likely to focus on diminishing the role of U.S. consumption in the global economy, reducing Asian savings and boosting European demand.

In an interview on CNBC late Tuesday, Canadian Prime Minister Stephen Harper echoed that sentiment, saying "we cannot hinge future growth simply on an overextended American consumer." (Additional reporting by Emelia Sithole-Matarise and Tamawa Desai in London; Editing by James Dalgleish)

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