NEW YORK (Reuters) - The dollar eked out modest gains on Tuesday as the market waited to see whether a much-anticipated statement from the Federal Reserve on Wednesday would signal it is ready to wind down its stimulative asset-purchase program later this year.
The statement is to be issued by the Federal Open Market Committee, the Fed's policy-making arm, after its two-day meeting. The U.S. central bank now makes purchases of $85 billion a month in bonds.
Fed Chairman Ben Bernanke said in May the Fed may start phasing out its bond-buying plan in September, fueling a dollar rally. Bernanke, however, backtracked a few weeks ago, saying quantitative easing will stay as long as the economy remains weak and inflation low.
Less stimulus could prod U.S. interest rates higher, making the dollar more attractive to investors.
"I think overall the expectation is that the Fed will still taper its asset buying this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
"It would take a big data miss in U.S. payrolls and GDP to derail that expectation and I don't foresee any big negative data surprises."
An advanced reading of second quarter gross domestic product in the United States, the broadest measure of aggregate economic activity, is due for release on Wednesday. GDP is expected to have expanded by just 1 percent in the second quarter, down from a 1.8 percent rise in the first, according to a Reuters poll.
Despite second quarter weakness, many experts believe the U.S. economy will outpace the economies of other countries, which should ultimately bode well for the dollar.
"Going forward, it our view that the U.S. economy will outperform much of the rest of the world in terms of economic growth," said Mark Frey, vice president and chief market strategist at Cambridge Mercantile Group in Vancouver.
A stronger U.S. economy, along with rising yields and shrinking money supply, will provide significant support for the dollar for the foreseeable future, he said.
"There will unquestionably be significant volatility, but from a pure market perspective, economic decision makers should be preparing themselves for a sustainably much stronger greenback in the months and possibly years to come," Frey said.
While economic figures on Tuesday such as U.S. house prices, which rose 1 percent in May, and consumer confidence, which came in shy of expectations, were not robust, they still depicted an improving U.S. economy.
In late afternoon trading, the dollar index was up 0.3 percent at 81.864 .DXY, rising for a second straight day. The index was well above Monday's five-week low of 81.499 and chart support at 81.524, the 200-day moving average.
Against the yen, the dollar was up 0.1 percent at 98.04 yen.
Part of the dollar's gains could also be attributed, traders said, to speculation that President Barack Obama, in a speech later today in Chattanooga, Tennessee, will propose that U.S. companies pay 5.25 percent on overseas earnings regardless of whether they repatriate the funds back to the United States.
The euro last traded flat at $1.3264 after hitting a nearly six-week high just north of $1.33. The euro was helped by surveys showing improved euro zone economic confidence.
Gains in the euro could prove temporary with the European Central Bank, at a policy meeting on Thursday, likely to keep monetary policy loose.
The Bank of England also meets on Thursday, and is likewise expected to retain its easy monetary bias.
Analysts at Barclays recommended reinitiating short euro/dollar positions, with a target of $1.28 and stops at $1.3430.
"The broader dollar strengthening trend remains very much alive," Barclays analysts said, adding that firmer U.S. data, including monthly jobs figures on Friday, could lead to a stronger dollar.
Meanwhile, the Australian dollar fell to a two-week low of $0.9041 against the greenback, just above a near three-year trough of US$0.8998 hit in mid-July, after Reserve Bank of Australia Governor Glenn Stevens said the currency could fall further and there was room for more interest rate cuts. It was last at $0.9064, down 1.5 percent.
The Swedish crown lost more than 1 percent against the euro after data showed the Swedish economy unexpectedly contracted during the second quarter. The euro hit a two-week high around 8.7006 crowns and was last up 1.1 percent at 8.6858, according to Reuters data.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Peter Galloway)
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