Dollar edges down as traders await Fed lift-off signal

By Jemima Kelly

LONDON (Reuters) - The dollar edged down across the board on Wednesday, with investors cautious ahead of U.S. inflation data and minutes from the Federal Reserve that could signal whether the central bank is on track to raise interest rates next month.

As an erratic Chinese stock market stoked fears about the stability of the world's second-largest economy, investors sought refuge in the safe-haven Swiss franc, which hit its highest level for almost two weeks against the euro .

The dollar has surged by almost 20 percent against a basket of major currencies in the past year <.DXY> as expectations have grown that the Fed will become the first major central bank to raise rates since the financial crisis.

And although it has stalled in the past few months as mixed U.S. data and worries over global growth have pushed back expectations of when that hike will come, most investors now reckon that the Fed "lift-off" will come by the end of the year, perhaps as soon as September.

The Fed releases the minutes from its latest policy meeting at 1800 GMT, while U.S. inflation data due at 1230 GMT will also be closely eyed.

"This is probably the most important day of the week in terms of data and events, so there is a bit of a wait-and-see mood," said Barclays FX strategist Hamish Pepper in London.

"The market will be most interested in where U.S. inflation comes in, because this is something that will determine not just when the Fed begins to normalize policy but also the pace at which they tighten, going forward."

The Bank of England is expected to follow the Fed with a hike, and that view was bolstered on Tuesday by higher-than-expected core UK inflation numbers that sent sterling to a 7-1/2-year high on a trade-weighted basis <=GBP>.

"The market may well look for a similar pick-up in the U.S. core inflation as we've seen in the UK," said Morgan Stanley's head of European FX strategy in London, Ian Stannard.

Stannard expects the euro to fall to $1.05 by the end of the year as the European Central Bank's 1 trillion euro quantitative easing program feeds through, but reckons that the single currency could gain in the short term if risk sentiment remains subdued.

The dollar was 0.1 percent lower on the day against its basket at 96.747, while the euro traded up 0.1 percent at $1.1065 as a diminished appetite for risk drove investors who had held euro-funded positions in emerging market currencies to buy back the single currency.

Against the Swiss franc, the euro was 0.4 percent lower at 1.0740 francs.

(Additional reporting by Masayuki Kitano in Singapore and Ian Chua in Sydney; Editing by Andrew Heavens)

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