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Europe, Forex

Dollar on hold as market braces for Fed policy shift

* Dollar eases off 2-month high, Fed seen cutting rates by 25 bps

* Pound takes breather after fall, still down 4.3% in July

* Euro lingers just off two-year lows on weak data

* Graphic: World FX rates in 2019 (New throughout, updates prices, market activity and comments; new byline, changes dateline, previous LONDON)

By Kate Duguid

NEW YORK, July 31 (Reuters) – The dollar was virtually flat on Wednesday morning ahead of what is widely expected to be the Federal Reserve’s first interest rate cut since the 2008 recession.

About 79% of traders now price in a 25 basis point cut, according to CME Group’s FedWatch tool. Expectations for a deeper easing have diminished recently due to stronger-than-expected data, including second-quarter economic growth, ADP’s private-sector jobs report and consumer confidence. The policy announcement will be released at 2:00 pm ET (1600 GMT).

Investors will focus on whether the Fed leaves the door open for further easing. Markets are pricing three cuts by year-end. If the message is more hawkish than expected, the dollar could rally.

“Markets remain cautious as Powell and company have been no stranger to policy mistakes. The long-term trend with little inflation despite how hot the economy is running should have them worried monetary policy is losing its effectiveness. If the Fed delivers only an insurance cut, markets will be extremely disappointed as equities will tumble and the dollar will surge,” said Edward Moya, senior market analyst at OANDA.

In mid-morning North American trade, the dollar index was flat around 98.06 after pulling back from a two-month high of 98.206 touched on Tuesday. It is however set for its biggest monthly gain since October and is up for the ninth straight day.

The dollar remains supported from expectations the European Central Bank and the Bank of Japan will also ease policy. Even after a one percentage point drop in the fed funds rate – a 2.25%-2.50% range – U.S. rates will remain well above most G10 peers, analysts noted.

Investors became more convinced the ECB will cut rates and resume money-printing stimulus after data showed economic growth in the euro zone halved in the second quarter. Inflation also slowed in July, with core inflation, the measure closely watched by the ECB, at 1.1% year-on-year.

After the data, the euro stayed around 0.13% lower at $1.114. Last week it hit two-year lows around $1.110.

The yen stood just off three-week lows against the dollar after the Bank of Japan refrained from expanding stimulus, though it committed itself to doing so “without hesitation” if required.

The pound, which has tumbled this week as investors rushed to factor in the growing possibility of Britain leaving the European Union without transition trade arrangements in place, firmed 0.59% to $1.222, crawling back from a 28-month trough of $1.212 plumbed on Tuesday. (Reporting by Kate Duguid and Sujata Rao; Editing by David Gregorio)

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