* Dollar mostly treads water ahead of Fed meeting
* Inflation comments from ECB officials nudge euro higher
* Markets look for Fed focus on inflation, no rate hike
(Updates prices, adds comments, adds U.S. data, changes
dateline, changes byline)
By Steven C. Johnson
NEW YORK, June 25 (Reuters) - The dollar fell against the
euro on Wednesday but was steady against a basket of currencies
hours before the end of a Federal Reserve meeting that markets
hoped would offer clues about future interest rate moves.
The euro edged above $1.56 <EUR=> after European Central
Bank President Jean-Claude Trichet warned that inflation risks
have risen and reiterated that policy-makers may lift euro zone
interest rates next month. See [].
But the main focus was on the U.S. central bank. Investors
expect the Fed to hold interest rates at 2 percent but are
eager to see whether officials echo their ECB counterparts by
focusing more closely on inflation rather than growth risks.
"The Fed is going to try to talk down inflation and
inflation expectations as much as it can, but the market does
not believe a move is imminent," said Firas Askari, head of
foreign exchange trading at BMO Capital Markets in Toronto.
Analysts said that could keep the euro trading near the
upper end of a broad $1.53-$1.58 range that has persisted for
the past month.
"Foreign exchange markets continue to be sensitive to
inflation more than any other story," said Simon Derrick, head
of currency research at Bank of New York Mellon in London.
"Investors will continue to favor currencies where the
central banks have both the ability and willingness to hike
rates if necessary."
Early in New York, the euro was 0.2 percent firmer at
$1.5592, near a session peak of $1.5607. The dollar edged up
0.1 percent to 107.98 yen <JPY=>, while sterling was unchanged
at $1.9716 <GBP=>.
Against a basket of six major currencies, the dollar was
off 0.1 percent at 73.171 <.DXY>.
A report on Wednesday showing orders for U.S. durable goods
were unchanged in May had little impact on currency prices, and
analysts said they expected little reaction to data tracking
May new home sales due at 10 a.m. (1400 GMT).
U.S. housing data has been uniformly poor, and a report
earlier this week showed U.S. consumer confidence fell to a
16-year low, raising doubts about the Fed's ability to raise
interest rates later this year to stem inflation.
However, U.S. short-term interest rate futures are pricing
in a half percentage point of rate hikes by year end.
"We look for a rate hike in September, primarily because we
think the current target rate is on an emergency setting and
arguably is inflationary," strategists at Brown Brothers
Harriman wrote in a note to clients.
For now, they said the Fed will attempt to sound more
hawkish on inflation without painting itself into a corner,
"as, arguably, the ECB has done."
(Additional reporting by Ian Chua in London; Editing by
Chizu Nomiyama)
