The dollar snapped three days of gains against a basket of currencies on Tuesday as investors await a Federal Reserve policy statement and debate whether strong U.S. data will support the currency going forward.

U.S. jobs numbers last week boosted expectations for higher U.S. interest rates by early 2010. But with a Fed announcement scheduled for the conclusion of a two-day meeting on Wednesday,

dollar investors chose to wait rather than continue to buy.

High-yielding currencies fell on Tuesday as European stocks eased .FTEU3, prompting traders to sell currencies seen to be higher-risk versus the dollar and the yen.

Analysts said there were few market-moving events and trading volumes are thin in the summer holiday season.

The reaction of the currency to data depends on whether the market thinks the Fed will maintain loose monetary policy regardless, said strategist Gareth Berry at UBS in London in a note to clients. The market seems to judge that the Fed will use Friday's non-farm payrolls as a vindication that growth is established and can proceed to unwind extremely loose monetary policy.

In early New York trade, the euro rose 0.1 percent to $1.4156, but stayed close to a one-week low around $1.41 hit on Monday. Traders saw support at the 40-day moving average around $1.4095.

The US dollar's recent gains are being pared today ostensibly ahead of tomorrow's outcome of the FOMC meeting and partly a function of the market's lack of conviction whether the greenback's ironic recent resilience to favorable economic news, said Brown Brothers Harriman in a note to clients.

The market showed little reaction to German consumer price inflation which was revised up to show a fall of 0.5 percent in July year-on-year, while the harmonized consumer price index posted its first annual drop since the index was introduced in 1995.

The Australian dollar fell 0.4 percent to $0.8339, while the New Zealand dollar slipped 0.9 percent on the day to $0.6693, after U.S. crude oil prices retreated from the day's high.

The yen gained broadly, pushing the Aussie down 0.9 percent to 80.54 yen, off a 10-month high of 82.00 yen on Monday, while the New Zealand dollar fell 1.4 percent to 64.59 yen, also retreating from a 10-month peak at 65.90.

Markets brushed off the Bank of Japan's decision to keep interest rates at 0.1 percent. BOJ Governor Masaaki Shirakawa said he saw no risk of a deflationary spiral in Japan.

The dollar was down 0.7 percent at 96.49 yen, off an eight-week high of 97.79 yen set last week on electronic trading platform EBS.

The dollar index fell 0.2 percent to 79.068 .DXY.

FED AHEAD

The euro hit the day's high against the Swedish crown of 10.349 crowns, according to Reuters data in New York, after ratings firm Standard & Poor's cut sovereign credit ratings for Estonia and Latvia on Monday. Swedish banks are heavily exposed to the Baltic region, which is gripped by deep recession.

The dollar has held onto most of its post-payrolls gains, which has prompted some in the market to wonder if the trend to sell the dollar on strong economic data is nearing an end.

Some though, remain cautious as the dollar had a similar short-lived climb in early June, when a smaller-than-expected drop in payrolls also spurred speculation that U.S. interest rates would start to rise sooner than expected.

The dollar is holding onto Friday's payroll-inspired gains, but it needs some fresh support to avoid sinking back as it did in June, said Chris Turner, head of FX strategy at ING in London.

The Fed is expected to keep rates steady at 0-0.25 percent on Wednesday, but paint a slightly brighter economic picture while dampening rate hike speculation. It is also likely to end its $300 billion Treasury purchases program, as scheduled.

Traders will keep an eye on the U.S. Treasury's quarterly refunding, where it will auction $37 billion dollars of 3-year notes on Tuesday of a total $75 billion on offer this week.

(Additional reporting by Naomi Tajitsu in London)

(Reporting by Nick Olivari)


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