FOREX-U.S. dollar down again on weak data, investors await Fed

(Updates to U.S. trading, adds data, comment, changes byline, dateline; previous LONDON)

* Traders taking risk off table ahead of Fed policy meeting

* U.S. housing starts fall in February, weigh on dollar

* BoJ stands pat on policy, market reaction limited

By Gertrude Chavez-Dreyfuss

NEW YORK, March 17 (Reuters) – The dollar fell for a second straight day on Tuesday, weighed down again by unexpectedly weak U.S. economic data as the Federal Reserve started a two-day policy meeting.

The dollar index was on pace for its largest two-day loss since early February.

Investors do not expect any change to the Fed’s benchmark interest rate, which has been pinned between zero and 0.25 percent for six years. But they anticipate the Fed dropping the word “patient” from its statement to describe its approach to raising rates later this year.

However, the mixed batch of U.S. economic data in the first quarter and the dollar’s strength could delay an interest rate increase many see happening in June.

“We see the Fed still being data-dependent especially after we have been seeing mixed data in the first quarter,” said Mark McCormick, currency strategist, at Credit Agricole in New York.

“We therefore see a lift-off in rates possibly in September, not June, and the dollar’s strength, which acts like a rate hike, has helped the Fed take its time in raising rates.”

In mid-morning trading, the dollar index was down 0.3 percent at 99.352. It has fallen nearly 1 percent the last two days, on track for its steepest two-day fall in about six weeks.

The dollar fell after U.S. housing starts plunged to their lowest in a year in the latest indication the economy hit a soft patch in the first quarter. Groundbreaking tumbled 17 percent to a seasonally adjusted annual pace of 897,000 units, the lowest since January 2014.

The data came a day after a report showed U.S. manufacturing output fell in February for a third straight month.

The euro, meanwhile, rose 0.6 percent against the dollar to $ 1.0632. The euro zone single currency had come under pressure after the European Central Bank began a bond-buying program last week that will pump more than one trillion euros into the euro zone economy.

But the euro won some relief after soft U.S. data cooled the dollar’s rally.

The dollar was flat against the yen at 121.25 yen, stuck in a narrow range since advancing to an eight-year high of 122.04 on March 10.

The Bank of Japan concluded a two-day meeting on Tuesday, standing pat on monetary policy and keeping its massive stimulus in place. Market reaction was limited because the outcome was expected.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Ahmed Aboulenein in London; Editing by James Dalgleish)

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