* Dollar falls sharply as market focuses on Fed easing
* Aussie rebounds, dollar at 15-year low vs yen
* Uncertainty about Fed policy, global currency talks looms (Updates prices, adds comment, changes byline)
By Wanfeng Zhou
NEW YORK, Oct 20 (Reuters) - The dollar headed for its worst day in more than three months on Wednesday, reversing the prior session's rally after an influential consultancy said the Federal Reserve plans to buy $500 billion of Treasuries over six months and leave itself room for more buying.
The dollar hit a 15-year low beneath 81 yen and the euro climbed near $1.40 as markets expect the Fed to start pumping money into the U.S. economy as soon as November, a policy known as "quantitative easing," which has driven the dollar down since September.
The report from Medley Global Advisors accelerated a dollar sell-off that began overnight as traders said the market's reaction to China's interest rate hike on Tuesday was overdone. The safe-haven dollar posted its best day in two months after China's tightening fueled worries about global growth.
The Medley report echoed comments made on Tuesday by a Fed official that $100 billion a month in bond purchases may be appropriate, providing traders an incentive to push the dollar lower. For details, see [ID:nN20250581] [ID:nN19258951]
"Dollar weakness into the Nov. 3 FOMC meeting is the clearest trade right now. Investors want to continue on that path," said Amelia Bourdeau, senior currency strategist at UBS in Stamford, Connecticut. "(Many) currencies dipped against the dollar yesterday and investors are buying them back."
The U.S. dollar index, which tracks the greenback versus a basket of six currencies <.DXY>, fell 1.3 percent to 77.155, on track for its biggest daily percentage decline since July 1.
The euro rose 1.7 percent to $1.3959
Citigroup currency strategists recommended going long the euro at $1.3845 with a $1.5145 target, a level last approached in November 2009.
A rise in German bond yields in anticipation of tighter euro zone policy was also helping the euro, particularly with investors focused on easier U.S. policy, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
The dollar hit a 15-year low at 80.84 yen on EBS and was
last down 0.6 percent at 81.07
The dollar showed little reaction to the Fed's Beige book report, which provided further evidence the economy is stuck in a weak recovery. [ID:nWALKLE6PW]
Dean Popplewell, chief strategist at FX brokerage OANDA in Toronto, said he expects to see "further volatility and probably a weaker dollar" until the Fed policy meeting and U.S. mid-term elections next month.
DOLLAR LOSSES MAY BE LIMITED
Analysts warned, however, that already large speculative bets against the dollar and lingering uncertainty about global currency tensions could limit dollar losses in the short run.
Some said China's move and recent assurances from Treasury Secretary Timothy Geithner the United States was not devaluing the dollar for export advantage suggest G20 finance officials may be trying to iron out differences over exchange rate policy ahead of their weekend meeting in South Korea.
Washington wants China to allow more rapid appreciation of the yuan, while Beijing and others complain that dollar weakness is stoking inflation by pushing money into their faster-growing economies.
German Chancellor Angela Merkel said Wednesday she backed a French proposal to put currency issues on the agenda of a November meeting of G20 heads of state. [ID:nLDE69J1W6]
"People are buying what floats, and what floats right now is the euro, the Australian dollar," said BNP Paribas strategist Sebastien Galy. "But if the G20 strikes some type of deal on currencies, that could reduce the size of quantitative easing, and less dollar creation will be positive for the dollar."
Sterling rose 0.9 percent to $1.5848