LONDON (Reuters) - The dollar hovered near its weakest for a year against a currency basket on Wednesday before a U.S. Federal Reserve policy decision later in the day expected to keep interest rates at record lows.
The euro pulled back slightly from a one-year high struck against the dollar earlier with stronger than forecast euro zone manufacturing, services activity and industrial new orders having little immediate impact as the market had largely priced in improvement in the sector.
The New Zealand dollar surged to its highest in 13 months against the U.S. currency after the economy unexpectedly pulled out of recession in the second quarter, fuelling expectations the central bank might have to start raising rates sooner than previously thought.
The kiwi smashed through all barriers to rise more than a cent to $0.7315, its highest since early August 2008, after gross domestic product (GDP) data showed the economy unexpectedly grew in the second quarter, ending a prolonged recession.
The jump in the kiwi prompted investors to shift more money into other higher-yielding currencies such as the Australian dollar from the U.S. currency, and helped trigger further speculative dollar selling against other currencies such as the euro and the yen.
Some in the market expect a slight correction in the currency market on some caution ahead of the Federal Reserve statement later in the session and the start on Thursday of a summit of leaders from the Group of 20 nations.
"Overall the FOMC and the G20 are unlikely to disrupt the recent positive tone in asset markets and that's likely to see the trends in currency markets resume," said Ian Stannard, currency strategist at BNP Paribas in London.
"I will be looking at the currency pullback I expect today to be very much providing a buying opportunity for the pro-cyclical and commodity currencies," he said.
The dollar index .DXY, which measures the dollar's value against a basket of six major currencies, was 0.1 percent lower at 76.022 by 0917 GMT (5:17 a.m. EDT), off an earlier low of 75.892, a level not seen since last September. Charts indicate the next support level at around 74.70.
The dollar index has shed more than 2.5 percent this month as speculators sold the dollar on rising confidence in a global recovery and expectations U.S. policymakers will keep interest rates at rock-bottom levels for some time.
The Fed, which ends its two-day meeting on Wednesday, is expected to reiterate its intention to keep an ultra-loose monetary policy for an extended period.
The euro was marginally firmer at $1.4792, having risen earlier past resistance around $1.4825 to a one-year high of $1.4843 on trading platform EBS.
Traders cited talk of a digital option in the euro at $1.48, where the option holder is in line for a payout of 10 million euros if the spot market rate is at that level or higher at the option expiry later in the day.
G20 "FLY IN THE OINTMENT"
The dollar fell as low as 90.47 yen on EBS before crawling back to 90.89 yen, down 0.3 percent from late U.S. trade. Dealers said stop-losses were triggered around the 90.90 yen level, making the earlier drop even sharper.
