* Euro hits 16-month peak vs dollar
* Dollar seen weighed down by accommodative Fed policy
(Recasts; updates prices, adds details)
NEW YORK, April 26 (Reuters) - The euro advanced to a
16-month high against the dollar on Tuesday, with little in the
way of its advance as long as the U.S. Federal Reserve still
lags other major central banks in raising interest rates.
The Federal Open Market Committee, the Fed's policy-making
arm, starts its two-day meeting on Tuesday.
The post-meeting news conference by Fed Chairman Ben
Bernanke on Wednesday -- the first regularly scheduled news
briefing by a Fed chief in the U.S. central bank's 97-year
history -- will be closely watched to see how the Fed plans to
exit from its ultra-loose policy.
"We still feel that the market is too optimistic of U.S.
growth and how soon the Fed may be required to act," said Bill
Chepolis, portfolio manager at DWS Investments, Deutsche Bank's
retail asset management business, in New York.
The European Central Bank last month raised rates for the
first time since July 2008. While some believe this may prompt
the Fed to tighten monetary policy sooner, financial markets
are still in a "carry trade" environment, he said.
The carry trade involves financing at low rates and
investing the proceeds in higher-yielding assets.
Chepolis, who oversees roughly $10 billion in assets, said
this means that they still feel U.S. sectors such as investment
grade corporate bonds and high-yield credit, and some
structured asset classes offer value relative to Treasuries.
The euro <EUR=> was last trading up 0.4 percent at $1.4640
after earlier touching a 16-month high of $1.4653.
The break to a new high opens up a test toward $1.48, and
the euro could then test $1.50 in the coming weeks if Bernanke
indicates that the Fed's accommodative policy may continue for
the foreseeable future, a forex technical analyst said.
The Fed is far more reluctant to tighten policy than the
ECB, a divergence largely behind the euro's 9.3 percent gain in
2011.
"The euro bloc seems committed to making things work for
the union so we are slightly positive on those bonds especially
shorter maturity," Chepolis said.
The Fed is expected to say it will stick to its plan to
complete a $600 billion bond-buying program in June. For
details, see []
If, however, the Fed surprises the market and turns more
hawkish it will pose a risk to the sizable amount of dollar
shorts in the currency market," Chepolis said.
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For graphic on Fed funds rate hike expectations:
http://r.reuters.com/xyz48r
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"Bernanke is likely to acknowledge that dollar policy is
set by the Treasury, but the Fed takes it into account in terms
of its impact on inflation and growth and that it is part of
the transmission mechanism of monetary policy," said Marc
Chandler, global head of currency strategy at Brown Brothers
Harriman in New York.
"Investors are unlikely to learn from Bernanke when the Fed
will tighten as it is doubtful that he himself knows," he
added.
The euro got a boost from investor relief at the sale of
close to 2 billion euros of short-term debt by Spain, wiping
away earlier losses after comments by European Central Bank
President Jean-Claude Trichet. []
The dollar index, which measures the currency's value
against six major currencies, was down 0.3 percent at 73.798
<.DXY>.
Traders say it could test a three-year low of 73.735 hit
last week. A break of that could open the way for a test of the
record low of 70.698 touched mid-July 2008, according to
Reuters data.
Against the yen <JPY=>, the dollar slipped to a four-week
low before recovering to trade at 81.62, down 0.3 percent.
The Australian dollar <AUD=D4> was up 0.5 percent at
$1.0778, very close to its post-float high of $1.0792 touched
earlier in the New York session.
