FOREX-Dollar rallies as Fed policy questions swirl

                                
 * Dollar higher year to date with Wednesday's gain
                                
 * Dollar rises to 2-week high vs yen, 1-wk high vs euro
                                
 * Uncertainty reins on size and scope of Fed easing
                                
 (Updates prices, adds details, adds quote, byline)
                                
 By Steven C. Johnson and Nick Olivari
                                
 NEW YORK, Oct 27 (Reuters) - The dollar's rise on Wednesday
pushed it into positive territory against major currencies for
the year as investors continued to unwind bets against the
greenback before a highly anticipated Federal Reserve meeting.
                                
 The U.S. central bank has telegraphed several times that it
will attempt to boost growth by pumping more money into the
economy through government bond purchases, and that has pushed
the dollar and U.S. bond yields lower in recent months.
                                
 But the anti-dollar trend started to stall this week as
questions about how much the Fed will spend and whether the new
measures will be carried out swiftly or phased in over time.
                                
 The dollar rebound tracked a rise in U.S. bond yields and a
narrowing of the gap between them and rates in Germany and
Japan. By Wednesday, an index of the dollar against six major
currencies <.DXY>, was back in positive territory for 2010.
                                
 Primary dealers polled by Reuters last week were
anticipating the Fed would buy at least $500 billion of
Treasuries [FED/R]. Those expectations have been since been
scaled back.See [ID:nN25168493] and [ID:nTOE69Q02H].
                                
 "Whether they (the Fed) actually give a size for the amount
of stimulus is questionable," said Anthony King, managing
director of investment grade fixed income at PineBridge
Investments in London. PineBridge Investments manage more than
US $78 billion in assets.
                                
 "That's why the dollar has strengthened somewhat this week
because market commentators had been leaning too far in the
other direction," King said.
                                
 The Fed will hold its next policy meeting on Nov. 2-3.
                                
 The dollar hit a two-week high just shy of 82 yen <JPY=>
and a one-week peak at $1.3741 per euro <EUR=>, which was also
undermined by euro zone banks taking up more cheap funding than
expected at a three-month ECB tender [ID:nLDE69Q0XN].
                                
 Traders said the break below $1.3750 could prompt a test of
last week's low around $1.3695.
                                
 DOLLAR BOOST IN 2011?
                                
 Many analysts say the gap between euro zone and U.S.
short-term rates means the euro is unlikely to fall below $1.35
in coming months. Investors expect the European Central Bank to
withdraw some stimulus measures as the Fed eases, which should
keep euro zone interest rates higher than U.S. rates.
                                
 King said the euro could rebound after the Fed ends the
suspense next week, but predicted gains would be limited.
                                
 "It's possible we could see $1.45 versus the euro. But I
wouldn't expect us to overshoot much more than that," he said.
                                
 Some analysts say looser U.S. policy will help the U.S.
economy grow faster than the euro zone's, which could struggle
in 2011 as governments try to put public finances in order with
strict spending cuts and higher taxes. [ID:nN27213289]
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PDF on G20's uneasy truce:    http://r.reuters.com/nan99p
FX column on the Fed:                     [ID:nLDE69L1EY]
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
                                
 CAPITAL CONTROLS
                                
 But uncertainty about that policy isn't helping global
policymakers, particularly those in fast-growing emerging
markets.
                                
 China, Brazil and others have complained that Fed policy
was stoking inflation by pushing money away from the dollar and
into their fast-growing economies.
                                
 These issues were prominent among discussions at a G20
meeting last week, at which finance leaders pledged not to
devalue their currencies for economic advantage.
                                
 But some emerging markets have felt compelled to try to
slow inflows with taxes on investment and other capital
controls, and analysts said more moves in that direction could
limit dollar losses.
                                
 The Korean won <KRW=> fell more than 1 percent Wednesday
after comments from the country's central banker provoked
speculation that the government may turn to capital controls
[ID:nSEL003184].
                                
 "Everyone is ready to go it alone, and the problem is that
nobody really has any clue what the Fed is going to do," said
Brown Brothers Harriman strategist Mark McCormick.
                                
 The Australian dollar, in demand because of its high
interest rates and trade links with emerging Asia, fell 1.7
percent to $0.9688 <AUD=D4>. Softer-than-expected inflation
data contributed to the currency's decline, traders said.
                                
 (Additional reporting by Wanfeng Zhou; editing by Diane
Craft)