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Dollar pinned in narrow ranges

LONDON: The dollar was pinned in narrow trading ranges against the euro and yen on Tuesday ahead of the Federal Open Market Committee's decision on U.S. interest rates.

Euro/dollar gleaned some comfort earlier from a stronger-than-expected German Ifo business climate survey but has since eased and was holding around 1/2 cent off Monday's $0.9746 peak, its highest since March 2.

Analysts said a quarter of a percentage point rise in the Federal Reserve's 5.75 percent Fed funds target rate was widely expected and should not have a negative impact on U.S. asset markets or the dollar.

"Ultimately things still seem pretty confident towards the dollar," said Michael Lewis, senior currency economist at Deutsche Bank in London.

Analysts said trading on foreign exchange markets was likely to remain fairly muted until the FOMC decision was made known at around 1915 GMT.

"We will sit tight and see what the Fed does and says and then what the reaction of the U.S. equity markets will be. That will be the peg for the performance of the dollar," said Patrick O'Sullivan, economist at AIB Group Treasury in Dublin.

"If the FOMC went by 50 basis points that would have a very negative reaction in the asset markets and would drag down the dollar."

Ahead of the FOMC decision the market will eye U.S. January international trade data, due at 1330 GMT.

"The next test for the dollar will be the trade numbers but with ongoing bond and foreign direct investment inflows it doesn't seem likely that that will disturb the picture too much," said Lewis at Deutsche.

An increase in the U.S. Federal Reserve's federal funds rate target later on Tuesday would also remind the market of the differentials in economic growth and interest rates between the United States and Europe, even though the European Central Bank raised its refinancing rate to 3.5 percent from 3.25 last week.

Analysts said the single currency seemed unable to shrug off its negative sentiment.

"We have had an Ifo number which is the strongest since German unification and yet the euro continues to perform very badly," said Deutsche's Lewis.

"The euro should consolidate and maybe edge up a bit higher against the dollar but there still seem to be a lot of people who want to sell the euro if it moves higher."

The west German Ifo index rose to 100.9 in February versus an upwardly revised 100.2 in January.

The dollar was within 1/2 yen of Monday's 107.10 peak, its highest in 1-1/2 weeks, recovering an earlier dip to 106.28.

Analysts said volumes were thin ahead of the outcome of the FOMC and the market would be reluctant to push the yen too much higher amid concerns the Bank of Japan might step in to try and curb any excessive strength of the Japanese currency.

The yen drew some support earlier from the Ministry of International Trade and Industry's all-industries index -- a measure of economic activity closely watched by economists to gauge gross domestic product -- which rose 0.5 percent in January after a 0.4 percent gain in December.

"It is a further confirmation of an overall improvement in the economy and suggests that there is potential for more yen strength," said Mamoru Yamazaki, senior economist at Paribas Capital Markets in Tokyo._Reuters