* Aussie hits parity vs US dollar for 2nd time since 1983
* U.S. dollar suffers a day before Fed policy decision
* Investors await results of U.S. midterm elections (Adds details, updates prices)
By Wanfeng Zhou
NEW YORK, Nov 2 (Reuters) - The U.S. dollar fell on Tuesday after Australia's surprising interest rate hike and positive economic news in the euro zone, but analysts warned of a possible rebound if the Federal Reserve disappoints markets at the end of its policy meeting on Wednesday.
Investors also awaited the results of U.S. mid-term elections on Tuesday. Some analysts said a Republican victory could be positive for the U.S. currency on market hopes for increased fiscal austerity and less government regulation.
But most investors have looked beyond the elections and focused instead on a two-day meeting of the U.S. central bank's Federal Open Market Committee, which looks set to announce a second round of monetary easing on Wednesday. For details, see [ID:nN01141530]
Expectations have centered around an initial commitment from the Fed to buy at least $500 billion in Treasuries over five months, which was less than the $1 trillion size some traders had initially estimated. However, much uncertainty surrounds the scope and pace of the purchases.
"There's every chance of a rebound in the dollar as I think its weakness has been directly correlated to fear the Fed was going to do something of shock-and-awe nature," said Alan Wilde, head of fixed-income and currency at Baring Asset Management in London. Baring oversees $50 billion in assets.
Analysts said the risk of a dollar recovery is building after the greenback has lost about 8 percent against a basket of major currencies since the start of September on expectations the Fed will purchase more assets, a move that would pressure U.S. yields and diminish the return on dollar-denominated investments.
The U.S. Dollar Index <.DXY>, which tracks the greenback against a basket of six currencies, hit a two-week low of 76.636 and was last down 0.7 percent at 76.724.
The euro
Traders said hourly momentum in euro/dollar is bullish, but very overbought, suggesting $1.4045/$1.4080 resistance will likely hold in the near term. Renewed worries about euro zone's sovereign debt issues could also limit the euro currency's upside.
Also on Tuesday, the Australian dollar hit a peak of
US$1.0025
The dollar rose 0.3 percent to 80.68 yen
MORE CONDITIONAL
Aroop Chatterjee, currency strategist at Barclays Capital in New York, said the dollar's reaction will depend not just on the size of asset purchases, but also on the commitment of policymakers to make the asset purchases.
"If the level of commitment is more conditional than what the market expected, that would disappoint," he said, adding: "U.S. data has been quite strong of late."
In the event of a dollar rebound, Chatterjee expects to see "bigger" gains against the euro, which has been "primarily driven by the negative dollar sentiment, rather than euro positive news."
Chatterjee sees euro/dollar at $1.35 in six months and $1.30 in 12 months.
Multimedia report on run-up to the Fed meeting:
http://link.reuters.com/pyb23q
Top News-U.S. elections: http://link.reuters.com/fyq86p
Steven Englander, Citigroup's head of G10 FX strategy in New York, said another uncertainty surrounding the Fed's program is "what the trade-off between dissents and QE2 commitments is."
No dissent, he said, even with a lower-than-expected initial commitment, will likely eventually be seen as U.S. dollar negative as it suggests "an agreement in principle with respect to the need for QE2 and debate over the size."
In contrast, Englander said two dissents at a moderate headline quantitative easing level will be a positive for the dollar as it would suggest that "there is much more internal opposition to QE2 than the market anticipated."