* Dollar index back above 200-day moving average
* Markets pares expectations for Fed easing
* BOJ holds off on new steps to combat stronger yen
(Updates prices)
By Wanfeng Zhou
NEW YORK, Aug 10 (Reuters) - The U.S. dollar rose on
Tuesday as investors scaled back expectations the Federal
Reserve would announce further aggressive easing measures to
prop up a softening U.S. economic recovery.
Speculation had been growing that the U.S. central bank
would signal a need for more stimulus or the restart of asset
purchases at the end of its meeting later in the day after
recent weak data fueled worries about growth.
But investors began to reassess their expectations
overnight. 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. Others say it will
adopt a wait-and-see attitude until at least next month.
"We don't think that the Fed will alter the language in its
FOMC statement or announce any restarting of quantitative
easing," said Amelia Bourdeau, a currency strategist at UBS AG
in Stamford, Connecticut. "Dollar shorts are being covered, so
we're seeing some dollar strength."
The euro fell as low as $1.3074 on electronic trading
platform EBS. It was last down 1.1 percent at $1.3086 <EUR=>,
retreating from a three-month peak of $1.3334 hit on EBS on
Friday.
The euro's decline accelerated after it fell below
trendline support on hourly charts near $1.3200, with stop-loss
orders also adding to the drop. Declines in U.S. stocks added
to weakness in the currency.
The dollar index <.DXY> rose 0.9 percent to 81.409,
climbing 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 consist of 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.
[] A decision is due around 2:15 p.m. (1815 GMT)
Accommodative monetary conditions are often negative for a
currency, partly because they can increase its liquidity.
Boris Schlossberg, director of currency research at GFT in
New York, said the dollar "may see a further relief rally on
any news" that additional quantitative easing is off the table
for now.
YEN STRENGTH
Ashraf Laidi, chief market strategist at CMC Markets in
London, said the most likely outcome is "a disappointing market
reaction" to the Fed announcement, which would include only "a
reference to asset purchases" instead of "an actual
implementation of asset purchases."
In such a scenario, he expects to see profit-taking in the
stock market and yen strength to overtake any dollar gains. The
Australian dollar, sterling and the Canadian dollar will be
among the biggest losers, he said.
"The Fed won't be able to do much at this point. In our
view, a second round of quantitative easing would be a mistake.
It would send a signal they are really worried about the U.S.
economy," said Piero Ghezzi, head of economics, emerging
markets and FX research at Barclays Capital.
Against the yen, the dollar was flat at 85.88 <JPY=>.
The dollar had earlier dipped to the day's lows against the
yen around 85.65 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. []
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 Vivianne Rodrigues; Editing by Dan
Grebler)
