* Moves in dollar seen driven by position adjustment
* Speculators turn short dollar for first time sincemid-February
* Dollar extends gains after array of U.S. data
* Aussie hurt as RBA chief talks down the currency
By Julie Haviv
NEW YORK, Oct 29 (Reuters) - The dollar climbed for a thirdstraight session against a basket of major currencies on Tuesdayas investors, convinced the Federal Reserve will keep U.S.monetary policy ultra-loose well into next year, trimmed bearishbets against it.
The greenback's gains were largely driven by positionadjustments For month-end and before the Fed's two-day policymeeting starting on Tuesday. Many have sold the dollar in recentweeks, suggesting that if the Fed stands pat on monetary policy,as widely expected, investors would opt to buy the dollar back.
The Federal Open Market Committee, the Fed's policy-makingarm, is expected to keep the monthly $85 billion bond purchasingprogram in place until at least next March, according to arecent Reuters poll.
Indeed, currency speculators went short or bet against thedollar in the latest week for the first time since mid-February,according to data from the Commodity Futures Trading Commissionreleased on Monday and Reuters calculation.
The dollar index, which tracks the greenback against sixcurrencies but is dominated by the euro, last traded 0.3 percenthigher at 79.492 after earlier hitting a peak of 79.530,its strongest level in a week.
Nevertheless, the dollar index remained within strikingdistance of Friday's 78.998, its lowest since February.
"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.
The dollar slightly extended gains after economic datagauging U.S. retail sales, inflation and home prices.
A gauge of consumer spending rose in September as Americanslikely snapped up Apple's new iPhone and bought leisure goods,but falling sales of automobiles pointed to sluggish economicgrowth during the third quarter.
U.S. producer prices unexpectedly fell in September and theincrease in the annual rate was the smallest in nearly fouryears, pointing to a benign inflation environment.
Meanwhile, U.S. single-family home prices rose in August andalso posted their strongest annual gain in more than sevenyears, a closely watched survey showed on Tuesday.
Against the yen, the dollar last traded at 97.98 yen,up 0.3 percent on the day.
One beneficiary of the dollar's recent decline has been theeuro, which hit a two-year high of $1.3833 on Friday.
The euro last traded at $1.3770, down 0.1 percent, 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."
Meanwhile, the Australian dollar retreated after ReserveBank of Australia Governor Glenn Stevens tried to talk it down.
It last traded 0.8 percent lower at $0.9492, downsmartly from a four-month high of $0.9758 touched lastWednesday.
"I don't disagree with the Governor and can easily imagineAussie/dollar at 0.80 in a couple of years' time," said KitJuckes, foreign exchange strategist at Societe Generale. "But Idon't think, sadly, that there will be much follow-through fromtoday's move and I still want to sell Aussie/dollar much closerto parity, much closer to the end of the year."