FOREX-Cautious Fed pours cold water on dollar

* Dovish Fed minutes dent strong dollar scenario

* Further Greek debt developments eyed for cues

* Greece expected to ask for extension of loan agreement

By Jemima Kelly

LONDON, Feb 19 (Reuters) – The dollar slipped on Thursday after minutes from January’s Federal Reserve policy meeting showed officials were concerned that hiking interest rates too soon could damage the U.S. economic recovery.

The euro benefited from the greenback’s weakness, gaining 0.3 percent to trade at $ 1.1436, though investors said the single currency remained vulnerable to downside risk amid tense Greek debt negotiations.

The dollar also fell against the yen, losing 0.1 percent to trade at 118.62 yen after coming down from a peak of 119.41 just before the Fed minutes on Wednesday. The dollar index was down 0.3 percent at 93.901.

In its January policy statement, the Fed gave a nod to turmoil in markets across the globe, saying it would take “financial and international developments” into account. It was the first time since January 2013 that the Fed made an overt reference to overseas economic events in its policy statement.

“The minutes were a bit on the dovish side compared to what the market was looking for so we saw the dollar coming under some initial pressure as a result of that, but I don’t think that changes the bigger picture,” said Ian Stannard, head of European FX sales at Morgan Stanley in London.

“While the Fed has the potential to generate some short-term volatility, we think the growth picture is the important thing and that is why we still believe we’re in a dollar bullish environment.”

U.S. debt yields, which spiked midweek and shored up the dollar, promptly declined in the wake of the minutes’ release.

Greece is expected to ask later in the day for an extension to its loan agreements with the euro zone as it risks running out of cash within weeks.

This seeming concession by Greece after weeks of haggling with creditors would give the euro some relief, but Athens must first overcome resistance from sceptical partners led by Germany.

“The euro is quite stable amid the Greek risk … the immediate focal point is how risk assets fare going forward, as they have performed relatively well despite Greece. Heightened risk appetite may eventually prompt players to cover euro shorts,” said Junichi Ishikawa, market analyst at IG Securities in Tokyo.

A report in the Frankfurter Allgemeine Zeitung (FAZ) that the European Central Bank would like Greece to introduce capital controls appeared to have little impact on the euro.

The currency market was slightly robbed of liquidity with most of Asia excluding Japan away on Lunar New Year holidays.

(Additional reporting by Shinichi Saoshiro; Editing by Crispian Balmer)

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