FOREX-Dollar vulnerable to Fed easing bets, yen struggles
* Dollar comes under pressure before Fed decision
* Hits 3-month low versus higher-yielding Aussie dollar
* Many expect Fed to announce bond buying of $45 bln a month
* But dollar at 8-month peak versus yen on BOJ expectations
By Jessica Mortimer
LONDON, Dec 12 (Reuters) - The dollar fell versus higher-yielding currencies including the Australian and New Zealand dollars on Wednesday on expectations the U.S. Federal Reserve would opt to pump yet more money into its domestic banking system.
But it hit an eight-month high against the yen on bets the Bank of Japan will implement more aggressive monetary easing after an election on Sunday expected to yield a victory for the Liberal Democratic Party.
The Fed is expected to announce a fresh round of Treasury bond purchases later on Wednesday, with many economists forecasting it will opt for monthly purchases of $45 billion.
However, analysts said there was a risk policymakers may decide to buy more than that, which would put the dollar under broad selling pressure.
"People are selling the dollar on the possibility that the Fed could do more easing than the market is expecting," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"If it is a neutral decision they could buy it back on the fact. But if they do more, say above $50 billion, then the dollar would be on the defensive."
The possibility of further easing in the United States is putting renewed focus on higher-yielding currencies as the world's four most liquid currencies - the dollar, the euro, the yen and the pound - all have near zero interest rates now.
The more dollars the Fed pumps into the market, the more cheaply-borrowed funds investors have to invest in assets which give bigger base returns.
The Australian dollar rose to a three-month high versus the U.S. dollar of US$1.0552, although near-term resistance around the Sept. 17 high of $1.0564 could cap gains.
The New Zealand dollar hit a nine-month high of US$0.8418, while the U.S. dollar slipped to an eight-week low of C$0.9853 against its Canadian counterpart.
Nordea's Christensen said further dollar falls could see the euro test last week's high of $1.3127.
The shared currency rose 0.2 percent to $1.3026, well above a low of $1.2876 reached last week, holding gains made after better-than-forecast German economic sentiment data on Tuesday.
YEN SEEN AS VULNERABLE
The prospect of more monetary easing in Japan continued to hurt the yen, with the dollar rising 0.55 percent to hit an eight-month high of 82.94 yen, just shy of reported options barriers at 83.00 yen.
The euro climbed 0.6 percent to a near eight-month high of 107.98 yen.
Market players said recent polls showing the opposition Liberal Democratic Party (LDP) and its smaller ally are heading for a resounding victory in the Japanese election had contributed to the latest bout of yen weakness.
LDP leader Shinzo Abe has called for more aggressive monetary easing in Japan to revive the stagnant economy.
"For the yen that means they will be able to implement stimulus measures and operate more aggressive control of the Bank of Japan, which will all point to further weakening of the yen," said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank.
Jones forecast the dollar to rally to 90 yen by the end of the second quarter of next year.
The dollar index fell 0.1 percent to 79.979 as a result of weakness against higher-yielding currencies, edging closer to a six-week low of 79.568 hit last week.
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