FOREX-US dollar falls before Fed; Aussie at 28-year high

* Aussie hits parity vs US dollar for 2nd time since 1983

* U.S. dollar suffers a day before Fed policy decision

* Investors await results of U.S. midterm elections
(Adds comment, updates prices, changes byline)

By Wanfeng Zhou

NEW YORK, Nov 2 (BestGrowthStock) – The U.S. dollar fell on Tuesday
after a surprise interest rate hike from Australia and positive
euro zone economic news but analysts warned of a possible
rebound if the Federal Reserve disappoints markets at the end
of its policy meeting on Wednesday.

Investors also awaited the results of U.S. midterm
elections on Tuesday and some analysts said a Republican win
could be positive for the U.S. currency on hopes for more
fiscal austerity and reduced government regulation.

But most investors have looked past elections and instead
focused on a two-day meeting by the Federal Open Market
Committee, which looks set to announce a second round of
monetary easing on Wednesday. For more see [ID:nN01141530].

Markets widely expect the Fed to commit to buying at least
$500 billion in Treasury debt in the coming months. Much
uncertainty surrounds the scope and pace of purchases, however,
as well as the level of commitment by policymakers.

“It’s not just a question of the size of asset purchases,
but also the commitment they (the Fed) have to purchases. If
the level of commitment is more conditional than what the
market expected, that would disappoint markets,” said Aroop
Chatterjee, currency strategist at Barclays Capital in New
York.

“U.S. data has been quite strong of late. Our economists
think the Fed will take a more incremental approach and will
make QE conditional on economic data,” he added, referring to
quantitative easing under which the Fed floods the economy with
cheap money in a bid to spur a stubbornly sluggish recovery.

Analysts said the risk of a dollar recovery is building
since the currency has sold off 8 percent against a basket of
currencies since September on expectations of the Fed printing
more money via large purchases of U.S. government debt.

Short speculative dollar positions have stayed above $20
billion in recent weeks.

David Rosenberg, chief economist and strategist at money
management firm Gluskin Sheff in Toronto, expects the dollar to
strengthen after the Fed announcement. “Its hugely oversold,”
he said.

In midday trading, the dollar index (Read more about the global trade. ) (.DXY: ), which tracks
the greenback against a basket of six currencies, was down 0.8
percent at 76.687.

The euro (EUR=: ) traded as high as $1.4052 on EBS, buoyed by
a pick-up in euro zone manufacturers’ output. [ID:nLDE6A10TX]

Traders, however, were skeptical that the euro will be able
to sustain gains above this level given renewed worries about
the region’s sovereign debt issues.

Ashraf Laidi, chief market strategist at CMC Markets in
London, said the S&P 500 stock index’s (.SPX: ) inability to
break through the 1,195 level suggests euro/dollar will be
unlikely break out of its $1.41-1.42 congestive resistance.

“The intermarket dynamics (are) increasingly set up for a
stabilizing greenback and reluctant equities,” he said.

DISSENTS A FACTOR

Citigroup’s head of G10 FX strategy Steven Englander wrote
in a note that another uncertainty that could come from the Fed
statement is “what the trade-off between dissents and QE2
commitments is.”

No dissent, he said, even with a lower than expected
initial commitment to an expected second round of quantitative
easing, will likely eventually be seen as U.S. dollar negative
as it suggests “an agreement in principle with respect to the
need for QE2 and debate over the size.”

By contrast, Englander said two dissents at a moderate
headline quantitative easing level will be a positive for the
dollar as it would suggest that “there is much more internal
opposition to QE2 than the market anticipated.”

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Multimedia report on run-up to the Fed meeting:

http://link.reuters.com/pyb23q

Top News-U.S. elections: http://link.reuters.com/fyq86p

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The Australian dollar hit a peak of US$1.0025 (AUD=D4: ), the
highest since the currency was floated in 1983. The Reserve
Bank of Australia raised its cash rate by 25 basis points to
4.75 percent as a preemptive strike against inflation. That
highlighted the contrast with the Fed which is widely seen as
easing policy further to help revitalize the U.S. economy and
extended the differential between the two economies’ two-year
yields to their widest since early 2008.

The dollar edged up 0.3 percent to 80.75 yen (JPY=: ), though
it was still close to the record low of 79.75 yen set in 1995.
The risk of Japanese intervention to weaken the yen was
expected to mount if the dollar slips below 80 yen.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by
James Dalgleish)

FOREX-US dollar falls before Fed; Aussie at 28-year high