GLOBAL MARKETS-Bruised dollar steadies before Fed minutes, stocks hesitant

Reuters - UK Focus

* Dollar at lowest level of the year vs currency basket

* European shares dip after near 7 pct rise in 2 weeks

* China's central bank stirs anxiety

* Fed meeting minutes awaited

By Marc Jones

LONDON, Feb 19 (Reuters) - The dollar was hovering at itslowest level of the year on Wednesday as investors waited to seeif Federal Reserve policymakers had foreseen this month'srelatively weak U.S. economic data at their latest meeting.

Recent surveys from jobs and house building to confidenceand manufacturing have left financial markets wondering whetherthe Fed might consider tweaking its stimulus withdrawal plans ifthe economic picture were to deteriorate.

Wall Street was expected to open in a cautious mood with theminutes from the Fed's late January meeting set to dominatealongside another splurge of data expected to show the economystill feeling the recent cold snap.

Futures prices pointed to the main S&P 500 and DowJones Industrial indexes starting down 0.3 and 0.1respectively.

But it was the recent weakness of the dollar thatremained the central theme after it slipped to its lowest levelof 2014 overnight.

"There is still this assumption that much of this bad datais due to the weather," said Philip Marey, a U.S. focusedeconomist at Rabobank.

"But if it turns out not to be the case and the trendcontinues once the winter is over, then the Fed will have a goodreason to slow tapering."

Hesitant share investors took a step back on Wednesday, alsoworried about interest rates in China and the extent of itseconomic slowdown.

European shares were off 0.3 percent, only theirfifth session of the month in negative territory, whilerisk-wary investors nudged U.S. and German government bondsyields down to 2.687 and 1.643 percent respectively.

With the dollar in the doldrums, the euro wascomfortable at $1.3745, having stretched as far as$1.3769 overnight, its highest in seven weeks and breaching akey resistance barrier at $1.3740.

"The euro strength over the last few days has been more of aprocess of elimination rather than fundamental euro areastrength," said Alvin Tan, an FX strategist at Societe Generale (Paris: FR0000130809 - news) in London.

"The U.S. data has been weak over the last couple of weeksand the UK inflation number yesterday helped kick euro-sterlinghigher."


Dealers have been surprised by the euro's resilience givenspeculation the European Central Bank would have to ease policyfurther to avert the risk of deflation.

"One could expect that if the real economy is getting up andif we see that in Germany wage increases are quite substantial,there might be a certain self-correcting trend (in inflation),"ECB member Ewald Nowotny told Reuters in an interview.

"So we will see whether this needs some specific action orwhether ... there would be a merit for waiting."

In Asia, Japan's Nikkei pared its early losses toend off 0.5 percent, battling to maintain the momentum ofTuesday's 3 percent rally which followed a decision by the Bankof Japan to expand a scheme to encourage more bank lending.

The emerging markets focus remained on rising unrest in bothUkraine and Thailand. Ukraine's sovereign bonds andcurrency both tumbled as a renewed wave of violence hit thecapital Kiev, adding pressure on Russia's rouble which has hitan all-time low against the euro.

The rouble's weakness stemmed mainly from thefinance ministry's plan to buy foreign currency to replenish oneof its sovereign wealth funds. Moscow shares also fellsharply.


Dealers also kept a careful eye on China's central bankafter it drained funds from the money market on Tuesday, thoughit took no new action on Wednesday which helped the Shanghaimarket bounce by 1.1 percent.

The People's Bank of China (PBOC) is trying to engineer agradual upward shift in the cost of money to encourage companiesto deleverage and discourage high-risk shadow banking activity,though investors are anxious it could hurt growth.

More below-forecast data on U.S. housing on Wednesday addedto the case for the Federal Reserve to be patient in reducingits bond-buying.

Later on Wednesday, the Fed will release minutes of itsJanuary policy meeting when it decided to trim its monthly assetbuying by another $10 billion.

Fed Chair Janet Yellen has since indicated that the centralbank was still inclined to keep tapering, though markets assumethe run of soft data will encourage caution in its efforts.

In commodity markets, gold slipped to $1,320 an ounce afterrunning into selling at a 3-1/2-month peak of $1,331.10.

U.S. crude rose to a fresh four-month high on forecasts oflower crude and oil products stockpiles due to new pipelinecapacity and robust winter demand.

Nymex crude futures were 78 cents higher at $103.19,having jumped 2.4 percent on Tuesday, while Brent crude edged down 10 cents to $110.37 a barrel.

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