Dollar eases in Asian trade ahead of Fed meeting

TOKYO (AFP) - The dollar slipped against the yen and the euro in Asian trade Tuesday as market players waited anxiously for the Federal Reserve's assessment of problems in US credit markets, dealers said.

They said the dollar edged down towards its all-time low against the euro and remained under pressure against the yen a day after hitting a four-month trough against the Japanese currency on worries about the US economy.

The dollar slipped to 118.65 yen in Tokyo morning trade from 118.88 in New York late Monday, when it had struck an early low of 117.18 before rebounding.

The euro firmed to 1.3812 dollars from 1.3793, approaching its all-time high of 1.3852 reached on July 24. The euro slipped to 163.88 yen from 163.97.

The dollar rallied against the yen in US trade Monday after a rebound in US share prices slowed the recent unwinding of risky carry trades that involve exchanging the Japanese currency into higher yielding currencies.

But the dollar rebound lost steam as markets waited to hear what the Fed has to say about the problems in the US market for sub-prime mortgages catering to people with patchy credit histories, dealers said.

Analysts expect the Fed to leave its key interest rate unchanged Tuesday at 5.25 percent, where it has been for 13 months but the markets will be watching closely for any hint of a possible cut in the coming months.

Growing doubts that US central bank would flag a possible rate cut pressured the dollar in Asian trade, said Yosuke Hosokawa, head of forex group at Chuo Mitsui Trust Bank.

"If inflationary concerns were not present, the Fed could lean towards a rate cut but with oil prices still high, it is difficult for it to do so. At the moment, it is a tough situation for the Fed to clearly assess," he said.

If the Fed does not soften its hawkish rhetoric, the recent US stock market rally could prove short-lived and the dollar is likely to remain under pressure, Hosokawa said.

But many market players still see a chance of a rate cut.

Currency markets see an 80-percent chance of a Fed rate cut by October to support the economy in the face of the mortgage market woes, NAB Capital analyst John Kyriakopoulos wrote in a note to clients.

"If the Fed maintains its greater concern that inflation stays high, rather than the economy slows sharply, and doesn't provide any hint of a rate cut, then the rebound in equity markets could prove short-lived," he added.

Commonwealth Bank of Australia said it did not believe that Tuesday's Fed statement would open the door to cuts in interest rates.

"The Fed is likely to reiterate its optimism on growth and again emphasize its ongoing focus on inflation risks," the bank said in a market note.