* Dollar falls back from 2-1/2-mth as FOMC looms
* Focus on whether Fed will indicate policy withdrawal
* Euro holds above $1.45 support
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By Jamie McGeever
LONDON, Dec 16 (Reuters) - The dollar weakened on Wednesday
as traders' inability to push the euro below $1.45 prompted a
wave of position-squaring ahead of the Federal Reserve's policy
decision and statement later in the day.
The euro had slipped to a two-and a half month low on
Tuesday but strong sovereign and options-related buying on
Wednesday averted a break below $1.45.
The European Central Bank said financial institutions took
up 97 billion euros at its final one-year tender on Wednesday,
virtually in line with analysts' expectations.
Sterling got a boost from surprisingly strong UK employment
data, while the Australian dollar fell after weak growth data
prompted speculation the Reserve Bank of Australia may pause
from raising interest rates.
But the main focus was the Federal Open Market Committee's
meeting. The FOMC is widely expected to leave interest rates on
hold at record lows, so all eyes are on the statement and clues
to when it may begin winding down its loose monetary policy.
"It had looked like the euro was breaking further lower, and
the ever so slight possibility (building in the market) of the
Fed tightening or winding down liquidity, which would be
supportive for the dollar," said Michael Hart, currency
strategist at Citigroup in London.
"But I don't think we can expect too many fireworks from the
Fed. They will be fairly cautious," he said.
Concern about some parts of the euro zone banking sector and
sovereign creditworthiness this week may have overshot, aiding
the euro's rebound back toward $1.46, Hart added.
At 1240 GMT the euro <EUR=> was up 0.3 percent at $1.4578
<EUR=>, after sliding to around $1.4510 earlier. The euro fell
as low as $1.4503 on Tuesday, its weakest since early October.
Charts showed the euro had made a decisive break below its
100-day moving average around $1.4650 for the first time since
April. Such a move is often followed by further weakness.
The dollar index was down 0.4 percent at 76.67 <.DXY>,
slipping further from the 2 1/2-month high of 77.092 the
previous day. Against the yen, it was unchanged at 89.60 yen
<JPY=>, pulling away from the day's low around 89.40 yen.
FOMC FOCUS
Economic data on Wednesday showed the euro zone
manufacturing and services sectors continued to improve in
December [].
The euro showed limited reaction to the ECB's final 1-year
liquidity operation at which banks borrowed 97 billion euros.
The euro has been stung by concerns about the health of euro
zone banks after Austria said on Monday it would nationalise one
of its major banks. The weak fiscal status of euro zone members,
including Greece, also weighed on the single currency.
The Australian dollar <AUD=D4> was down 0.7 percent at $0.90
after Australia's GDP grew by 0.2 percent in the third quarter,
less than forecast, while dovish RBA remarks prompted investors
to trim expectations for tightening next year. []
Sterling rallied after figures showed the claimant count
surprisingly fell in November, the first decline in almost two
years. The pound was up 0.5 percent at $1.6365 <GBP=> and the
euro fell through key 100-day moving average technical support
at 89.25 pence to trade at 89.05 pence <EURGBP=>.
Many analysts expect the U.S. central bank will stick to its
pledge to keep interest rates at essentially zero for an
"extended period" in its policy statement due at 1915 GMT,
suggesting rates will not start rising until later in 2010.
Still, some in the market say a run of strong U.S. economic
data shows the economy is crawling out of recession, prompting
some anticipation the Fed may end fiscal stimulus measures soon.
This would be seen as the first step towards raising rates
and as a positive for the dollar after the U.S. currency has
suffered for most of the year on the view that other central
banks will begin to raise rates before the Fed.
"The FOMC is likely to tweak the statement to note that
conditions in financial markets have improved modestly since the
last meeting," Barclays analysts said in a note.
"But the broader message should remain that the Fed does not
expect to change its policy stance soon."
