Dollar edges up ahead of Fed minutes, euro weakens

[October 08, 2014]  By Jemima Kelly

LONDON (Reuters) - The dollar edged up against most major currencies on Wednesday, as traders waited for minutes from the Federal Reserve's latest policy meeting for signs that the United States was moving closer to interest rate rises.

The minutes from the U.S. central bank's rate-setting Federal Open Market Committee (FOMC) are due later in the U.S. day and traders will be acutely sensitive to how the debate between hawks and doves on the committee has been playing out.

Minneapolis Federal Reserve Bank President Narayana Kocheralakota said on Tuesday that low inflation should compel the Fed to hold from raising interest rates for now, despite a fall in U.S. unemployment.

The dollar was up 0.1 percent against a basket of major currencies at 85.761 <.DXY>, having hit a four-year high of 86.765 last week.

With the Fed due to wind down its $4 trillion bond-buying program this month, and the International Monetary Fund having cut its global economic growth forecasts for the third time this year, a mood of risk aversion permeated markets.

"The focus today is on the FOMC minutes - markets are in waiting mode for that," said Alvin Tan, a currency strategist at Societe Generale in London.

"The minutes will be important in driving market direction, in particular in seeing whether risk aversion worsens from here."

The dollar had hit a three-week low against the safe-haven yen overnight of 107.75 yen <JPY=>, but was last up 0.3 percent at 108.33 yen.

EURO GLOOM

The euro weakened, hitting a one-month low of 136.50 yen <EURJPY=> in Asian trading on deepening worries about euro zone growth prospects and the looming threat of deflation.

Earlier, Spain posted its weakest industrial output growth for almost a year. That came a day after corresponding data from Germany showed industrial output in the euro zone's biggest economy fell by 4 percent in August - the biggest drop since the height of the financial crisis.

The IMF cut its growth forecasts for the euro zone on Tuesday, flagging the risk of deflation and the chance of the 18-nation bloc entering into an outright recession in 2015.

A German newspaper added to the gloom on Wednesday, reporting that a group of leading economic institutes was set to sharply cut its growth forecasts for Germany.

Against the dollar, the euro was down 0.1 percent at $1.2655.

The single currency has fallen almost 10 percent against the dollar over the past five months as the outlooks for growth and monetary policy in the euro zone and United States have become increasingly divergent.

"The story is not going to change: there's quite clearly been a sea change ... in attitudes toward the euro and the dollar," said Neil Mellor, a currency strategist at Bank of New York Mellon in London.

"If there was one defining moment in the post-crisis period it has been that the ECB has taken away all reasons to hold the euro," Mellor added, referring to the cut of the deposit rate into negative territory.

ECB Vice President Vitor Constancio said on Wednesday that the central bank is embarking on a new policy phase with its latest stimulus measures, while promising to steer the ECB's balance sheet "significantly higher".

(Additional reporting by Ian Chua in Sydney and Shinichi Saoshiro in Tokyo; Editing by Robin Pomeroy)

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