FOREX-US dollar on pace for worst day in 3-1/2 months

                                
 * Dollar falls sharply as market focuses on Fed easing
                                
 * Aussie rebounds, dollar at 15-year low vs yen
                                
 * Uncertainty about Fed policy, global currency talks looms
 (Updates prices, adds comment, changes byline)
                                
 By Wanfeng Zhou
                                
 NEW YORK, Oct 20 (Reuters) - The dollar headed for its
worst day in more than three months on Wednesday, reversing the
prior session's rally after an influential consultancy said the
Federal Reserve plans to buy $500 billion of Treasuries over
six months and leave itself room for more buying.
                                
 The dollar hit a 15-year low beneath 81 yen and the euro
climbed near $1.40 as markets expect the Fed to start pumping
money into the U.S. economy as soon as November, a policy known
as "quantitative easing," which has driven the dollar down
since September.
                                
 The report from Medley Global Advisors accelerated a dollar
sell-off that began overnight as traders said the market's
reaction to China's interest rate hike on Tuesday was overdone.
The safe-haven dollar posted its best day in two months after
China's tightening fueled worries about global growth.
                                
 The Medley report echoed comments made on Tuesday by a Fed
official that $100 billion a month in bond purchases may be
appropriate, providing traders an incentive to push the dollar
lower. For details, see [ID:nN20250581] [ID:nN19258951]
                                
 "Dollar weakness into the Nov. 3 FOMC meeting is the
clearest trade right now. Investors want to continue on that
path," said Amelia Bourdeau, senior currency strategist at UBS
in Stamford, Connecticut. "(Many) currencies dipped against the
dollar yesterday and investors are buying them back."
                                
 The U.S. dollar index, which tracks the greenback versus a
basket of six currencies <.DXY>, fell 1.3 percent to 77.155, on
track for its biggest daily percentage decline since July 1.
                                
 The euro rose 1.7 percent to $1.3959 <EUR=>, the biggest
daily increase since July 1. It had earlier risen as high as
$1.3991 on trading platform EBS and off a $1.3699 session low.
Traders said $1.40 remains a strong resistance and selling
interest was clustered around $1.4010-20.
                                
 Citigroup currency strategists recommended going long the
euro at $1.3845 with a $1.5145 target, a level last approached
in November 2009.
                                
 A rise in German bond yields in anticipation of tighter
euro zone policy was also helping the euro, particularly with
investors focused on easier U.S. policy, said Marc Chandler,
global head of currency strategy at Brown Brothers Harriman.
                                
 The dollar hit a 15-year low at 80.84 yen on EBS and was
last down 0.6 percent at 81.07 <JPY=>. Japan spent a bit more
than $20 billion last month to weaken the yen, but that failed
to keep the dollar from nearing its record low beneath 80 yen.
                                
 The dollar showed little reaction to the Fed's Beige book
report, which provided further evidence the economy is stuck in
a weak recovery. [ID:nWALKLE6PW]
                                
 Dean Popplewell, chief strategist at FX brokerage OANDA in
Toronto, said he expects to see "further volatility and
probably a weaker dollar" until the Fed policy meeting and U.S.
mid-term elections next month.
                                
 DOLLAR LOSSES MAY BE LIMITED
                                
 Analysts warned, however, that already large speculative
bets against the dollar and lingering uncertainty about global
currency tensions could limit dollar losses in the short run.
                                
 Some said China's move and recent assurances from Treasury
Secretary Timothy Geithner the United States was not devaluing
the dollar for export advantage suggest G20 finance officials
may be trying to iron out differences over exchange rate policy
ahead of their weekend meeting in South Korea.
                                
 Washington wants China to allow more rapid appreciation of
the yuan, while Beijing and others complain that dollar
weakness is stoking inflation by pushing money into their
faster-growing economies.
                                
 German Chancellor Angela Merkel said Wednesday she backed a
French proposal to put currency issues on the agenda of a
November meeting of G20 heads of state. [ID:nLDE69J1W6]
                                
 "People are buying what floats, and what floats right now
is the euro, the Australian dollar," said BNP Paribas
strategist Sebastien Galy. "But if the G20 strikes some type of
deal on currencies, that could reduce the size of quantitative
easing, and less dollar creation will be positive for the
dollar."
                                
 Sterling rose 0.9 percent to $1.5848 <GBP=D4>, shaking off
losses after Bank of England minutes showed a three-way split
among policymakers, with one voting for more monetary easing.
 (Additional reporting by Steven C. Johnson; Editing by Andrea
Ricci)