FOREX-Dollar inches up, but caution rules before Fed statement

(Adds details, fresh quotes)

* Dollar index off 11-year high ahead of Fed statement

* Surprise monetary easing in Singapore helps U.S. dollar

* Surge in Greek bond yields weighs on euro

By Anirban Nag

LONDON, Jan 28 (Reuters) – The dollar climbed against a basket of currencies on Wednesday, recouping some of the previous day’s sharp losses, although gains were muted before a statement from the Federal Reserve after its policy meeting.

Interest-rate sensitive two-year Treasury yields held above 0.50 percent, lending support to the dollar.

The U.S. currency fell on Tuesday after weaker-than-forecast corporate earnings reports and durable goods data made some traders and investors nervous that the Fed could turn more cautious in its guidance on future rate rises, given that plunging oil prices have cooled inflationary pressures.

That view, though, was partly offset by strong consumer confidence and home sales data. The Fed is still expected to signal a “patient” approach to raising interest rates after its first two-day policy meeting of the year concludes on Wednesday, but the dollar could be vulnerable if the Fed shows any unease with the dollar’s strength, traders said.

“The Fed is going to be patient and we could see investors price out chances of a near-term interest rate hike,” said Peter Kinsella, currency strategist at Commerzbank, London. “That could lead to short-term dollar weakness.”

The dollar index was up 0.1 percent at 94.137, having posted its biggest fall since early October on Tuesday. It was still below a 11-year high of 95.481 hit on Friday, but got a slight boost from a surprise monetary easing by Singapore, which lifted the dollar against the Singaporean dollar and other Asian currencies.

Nevertheless, given investors have put in place a huge amount of long dollar bets since the second half of last year on expectations that the Fed will start raising rates this year as the U.S. economy recovers, there was an element of caution.

Jitters about the dollar’s strength have also grown after a flurry of reports from some large U.S. companies suggested a rising dollar was eating into sales and profits.

“Since the end of last year, money market rates suggest that investors have become less confident about the prospects of a mid-2015 rate hike,” said Jane Foley, senior currency strategist at Rabobank.

“If the Fed signals that it is willing to extend its patience on policy moves, then the dollar could soften.”

Against the yen, the dollar was flat at 117.80 yen, well below last week’s high of 118.80.

The euro traded 0.2 percent lower at $ 1.1355 as a surge in Greek bond yields weighed on sentiment towards the single currency, traders said.

The euro had risen to $ 1.1423 on Tuesday, extending its rebound from an 11-year low of $ 1.1098 hit on Monday.

(Editing by Hugh Lawson/Ruth Pitchford/Susan Fenton)

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