FOREX -Dollar index extends gains before Fed meet; Aussie falls

Reuters

* Moves in dollar seen driven by position adjustment

* Fed expected to maintain stimulus programme

* Aussie hurt as RBA chief talks down the currency

By Anirban Nag

LONDON, Oct 29 (Reuters) - The dollar rose against a basketof currencies on Tuesday as investors, already persuaded theFederal Reserve will keep policy ultra-loose in the near term,trimmed bets against it.

The dollar index gained for a second day, rising 0.3percent to 79.478, drawing support from a stabilisation in U.S.Treasury yields and prospects of month-end demand. However, itheld close to Friday's 78.998, its lowest since Feb. 1.

The index has shed about 1 percent this month, after a 2.3percent drop in September, as investors pushed back expectationsof when the Fed would scale back stimulus.

Traders said the latest moves were driven by positionadjustments before the Fed's two-day policy meeting starting onTuesday. Many have sold the dollar in recent weeks, suggestingthat if the Fed stands pat on monetary policy, as widelyexpected, investors could buy back the greenback.

"Investors are expecting a dovish tone from the Fed and thatis more or less priced in. There is a lightening of positionsbefore the Fed, but volumes are low - at least 20-30 percentlower than usual," said Alvin Tan, currency strategist atSociete Generale.

Traders said it was unlikely the dollar would be adverselyhit should the Fed choose to wait for more evidence of how badlyWashington's budget battle hurt the U.S. economy before decidingon whether to reduce stimulus.

That has left the dollar less vulnerable to bad news.Rather, there was scope for it to rally if U.S data began tobeat expectations again, traders added. On Tuesday, the focuswill be on September retail sales data, with economistsforecasting a modest rise.

One beneficiary of the dollar's recent decline has been theeuro, which hit a two-year high of $1.3833 on Friday.

However, it fell 0.2 percent on Tuesday to $1.3760, withinvestors wary the European Central Bank may express discomfortwith the single currency's strength in coming weeks.

"One gets the feeling speaking to clients that moves in theeuro and expectations that the Fed will be dovish have gone toofar," said Manuel Oliveri, FX strategist at Credit Agricole. "Tothat extent, we think the dollar's downside is limited."

The Australian dollar retreated after Reserve Bank chiefGlenn Stevens tried to talk it down. It fell 0.8percent to $0.9496. Last Wednesday, it touched $0.9758,a four-month high.

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