* Euro down 0.6 pct at $1.3150 <EUR=>
* Dollar index back above 200-day moving average <.DXY>
* Markets expect some Fed easing steps but not full QE
* Shirakawa remarks, falling share prices support yen
(Adds quote, updates prices)
By Tamawa Desai
LONDON, Aug 10 (Reuters) - The dollar rose on Tuesday as
traders trimmed short positions, awaiting the result of the U.S.
Federal Reserve's policy meeting amid speculation of further
easing to shore up a flagging U.S. economy.
Market players expect a dovish tone from the Fed but are
divided as to how far it would go to back up its words with
action. Some see the Fed taking minor steps such as reinvesting
funds to maintain its balance sheet, but not going back to
full-fledged quantitative easing.
The dollar reversed losses posted last week after weak U.S.
payrolls cranked up expectations the Fed may ease monetary
policy. Accommodative monetary conditions are often negative for
a currency partly because they can increase its liquidity.
"We're seeing some squaring up of short positions ahead of
the Fed, and there is some risk-off sentiment as well as Asian
stocks closed lower, prompting a selloff in high yielders such
as the Australian dollar," said Christian Lawrence, currency
strategist at RBC Capital Markets.
European shares <> slipped 0.8 percent, following a
slide in Asian stock prices. This helped to push the New Zealand
dollar down roughly 1 percent on the day versus its U.S.
counterpart <NZD=D4>, while the Australian dollar <AUD=D4> fell
0.6 percent.
By 1022 GMT, the euro had fallen 0.6 percent from late U.S.
trade on Monday to $1.3150 <EUR=>, retreating from a three-month
peak of $1.3334 hit on Friday on trading platform EBS.
The euro's decline accelerated after falling below trendline
support on hourly charts near $1.3200, with stop-loss orders
also adding to the drop.
Still, support was seen at $1.3125, the 38.2 percent
Fibonacci retracement of its November 2009-June 2010 fall.
The dollar index <.DXY> rose 0.6 percent to 81.168, rising
above its 200-day moving average around 80.835 on Tuesday and
indicating a decreased selling signal. Dollar weakness late last
week had pushed it below that key level.
Steps by the Fed could range from a pledge to consider more
quantitative easing, reinvesting money from maturing debt into
Treasuries or mortgage-based securities, cutting interest paid
on excess reserves, and buying financial assets outright.
[]
Its decision is due around 1815 GMT.
YEN EDGES UP
The yen was the exception to the dollar's broad rebound as
it edged up against the greenback. Traders in Tokyo cited talk
of fund repatriation by Japanese investors related to coupon
payments of U.S. Treasuries due in mid-August.
The dollar dipped to the day's lows against the yen around
85.65 yen after Bank of Japan Governor Masaaki Shirakawa said no
major central bank targets currency levels. He also said the
central bank's board spent much time debating the recent rise in
the yen and how it could affect business sentiment.
[]
The Bank of Japan kept interest rates steady at 0.1 percent
and held off on new policy steps, as expected. []
BTM UFJ analysts said it would be difficult for Japan to
justify acting to stem yen strength given that the currency's
recent rise versus the dollar had been orderly. It would also be
hard to argue the move had been out of line with economic
fundamentals, they said.
"With the near-term risk of renewed BOJ monetary easing or
yen intervention still low, the yen's upward advance should
continue unimpeded," they said in a note.
The dollar was a touch lower at 85.85 yen <JPY=>, holding
above last Friday's eight-month low of 85.02 yen.
Market players said there were substantial stop-loss orders
just under options barriers at 85 yen, with more stops sitting
below 84.82 yen. A fall below 84.82 yen would take the dollar to
a 15-year low against the yen.
(Additional reporting by Naomi Tajitsu; Editing by Susan
Fenton)
