Dollar teeters, gold takes a breather as markets await Fed

© Reuters. FILE PHOTO: Security guard wearing a face mask walks past the Bund Financial Bull statue on The Bund in Shanghai

By Tom Westbrook and Suzanne Barlyn

SINGAPORE/NEW YORK (Reuters) - The U.S. dollar hovered just above a two-year low on Wednesday, while stocks struggled, as growing worries about the U.S. economy had investors cautious and looking to Congress and the Federal Reserve for a boost.

The Fed is expected to strike a dovish stance at its policy review later in the day and perhaps open the door to a higher tolerance for inflation - something dollar bears think could squash real yields and sink the currency even further.

A $1 trillion U.S. fiscal rescue package is also at an impasse as a Friday deadline to extend unemployment benefits looms.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) rose 0.1% as gains in China offset small losses elsewhere. Japan's Nikkei (N225) was down 0.8% on a rising yen and weak start to corporate earnings season.

Against a basket of currencies (=USD) the dollar wallowed just 0.3% above a two-year low hit a day ago. It has lost 3.7% in July so far and is headed for its worst month in nine years.

Gold <xau=>steadied around $1,960 an ounce, pulling back from a $1,980 high on Tuesday but still having gained nearly $150 in eight sessions. [GOL/] S&P 500 futures (ESc1) were flat.</xau=>

The Fed's forward guidance probably determines the next move and the extension of several emergency lending facilities on Tuesday fuelled anticipation of a particularly dovish tone.

"Some pockets of the market are looking for the forward guidance to be a bit bolder in a dovish direction," said Imre Speizer, currency analyst at Westpac in Auckland. "If we don't get that, you may well get a small rebound in the dollar."

The Fed publishes its interest rate decision, which is not expected to change, at 1800 GMT and Chair Jerome Powell holds a press conference half an hour later.

The bond market was also in a cautious mood ahead of the meeting, having retraced a selloff on Tuesday to leave benchmark U.S. 10-year yields (US10YT=RR) at 0.5823%.

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Besides the Fed, the other focus is on political wrangling over the next U.S. fiscal package, which weighed on Wall Street overnight where the S&P 500 (SPX) fell 0.6%.

Republicans' $1 trillion proposal includes cutting a weekly $600 unemployment benefit, which expires on Friday, to $200 just as cracks emerge in the economic rebound.

U.S. consumer confidence fell by more than expected this month, as COVID-19 infections flared.

The Democrats are pressing for a larger spending commitment, while President Donald Trump also said he didn't like elements of the Republican plan, adding to the sense of confusion.

"This is a big deal - there's 30 million people unemployed and so much of U.S. GDP is consumer spending," said Chris Brankin, CEO of brokerage TD Ameritrade (NASDAQ:AMTD) Singapore.

"Markets are hopeful that some type of extension gets done...even if it's reduced - if you just cut if off wholly you'd see significant volatility in the markets."

Elsewhere in currencies, the Australian dollar <aud=d3>eased to $0.7164 after second quarter consumer prices fell by the most on record, cementing views interest rates would stay low for a long time to come.</aud=d3>

The euro (EUR=EBS) was steady at $1.1723 while the yen <jpy=>was testing a new four-month top at 105.09 per dollar.</jpy=>

Copper prices climbed back towards a two-year high hit two weeks ago, on hopes that global stimulus would help industrial demand.

Oil prices steadied after a surprise drop in U.S. inventories pointed to energy demand, even as virus infections surge.

Brent crude futures (LCOc1) were last up 0.2% at $43.29 per barrel and U.S. crude was flat at $41.03 a barrel.

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