FOREX-Dollar rises for third session before Fed decision

Reuters

* Fed begins two-day meeting, unlikely to shift policy

* Comments made by ECB's Nowotny briefly buoy euro

* Aussie slumps as RBA chief talks down the currency

By Wanfeng Zhou

NEW YORK, Oct 29 (Reuters) - The dollar rose for a thirdstraight session against major counterparts on Tuesday astraders bought back the currency on the view markets havealready priced in expectations the Federal Reserve will maintainits bond-buying program in coming months.

Traders also said the dollar's recent drop, which had takenit to a nine-month low against a basket of currencies, may havebeen overdone. But sentiment remains negative and investors willlikely see any rebound as a selling opportunity.

The Fed is unlikely to shift monetary policy at the end ofits two-day meeting on Wednesday as it awaits more evidence ofhow badly Washington's budget battle has hurt the economy. Mostexpect the Fed will not begin reducing its $85 billion per monthbond-buying program until March 2014.

"With that largely priced in, there's a risk that theymention maybe that it's not going to be quite as long of a delayas what the markets anticipated," said Eric Viloria, currencystrategist at Forex.com in New York.

"I would say that the rebound we're seeing today is probablyjust some short-covering ahead of the statement tomorrow."

The dollar index, which tracks the greenback against sixcurrencies, rose 0.5 percent to 79.631, moving furtheraway from a nine-month low of 78.998 set on Friday.

Should the Fed sound less dovish or provide a hint as towhen it may curb its asset purchases, the dollar could gain asparticipants cover bets against the currency.

Currency speculators went short, or bet against the dollar,in the week ended Oct. 8 for the first time since mid-February,according to data from the Commodity Futures Trading Commissionreleased on Monday and Reuters calculation.

Alvin Tan, currency strategist at Societe Generale, saidlight trading volumes, which were at least 20 to 30 percentlower than usual, also helped amplify movements.

The euro fell 0.3 percent to $1.3741. It had earlierrisen to a session high of $1.3813, not far from last week'stwo-year peak of $1.3832, after European Central Bank GoverningCouncil member Ewald Nowotny told MNI that he saw no tool thecentral bank could use against a strong euro.

The single currency has climbed about 8 percent against thedollar since early July.

Some traders said the euro could struggle to gain further,with investors remaining wary the ECB may express discomfortwith the single currency's strength in the 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."

Against the yen, the dollar rose 0.5 percent to 98.14 yen, while the euro gained 0.2 percent to 134.87 yen.

Earlier, U.S. data showed U.S. consumer spending rose inSeptember, but consumer confidence tumbled in October as apartial government shutdown rattled households.

With lawmakers yet to agree on a budget, economists fearanother damaging fight might be in the cards early next year,which could further hit confidence in the U.S. currency.

The Australian dollar retreated after Australia's topcentral banker said it was likely the currency would fallmaterially given the country's declining terms of trade.

It last traded 1 percent lower at $0.9477, downfrom last Wednesday's $0.9758, a more than four-month high,according to Reuters data.

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