FOREX-Dollar on hold for Fed, euro falls after Draghi stimulus signal

(Recasts; adds analyst quote; updates prices; changes dateline,
previous LONDON)
By Kate Duguid
NEW YORK, June 18 (Reuters) - The U.S. dollar was modestly
higher on Tuesday morning, as traders held off from making large
bets ahead of the Federal Reserve policy announcement on
Wednesday.
The Fed begins its two-day policy meeting on Tuesday, and
will issue a statement and economic projections at the
conclusion of the meeting tomorrow. It is expected to leave its
benchmark overnight policy rate unchanged at the current range
of between 2.25% and 2.5%. But slow employment growth in May,
the ongoing trade war with China, comments by Federal Open
Market Committee members and weak inflation data have increased
expectations for dovish remarks.
The dollar index .DXY was last up 0.17% at 97.728.
"Markets are largely keeping the powder dry ahead of
tomorrow's Fed announcement," said Karl Schamotta, chief market
strategist at Cambridge Global Payments.
"We're thinking that we are going to see a relatively dovish
announcement, certainly acknowledging that risks have grown
since the April meeting," said Schamotta, citing the expectation
in April that a U.S.-China trade deal was near.
"A recognition of that worsening environment is very likely,
but a rate cut at this point I don't think is on the table."
CME Group's FedWatch tool puts the probability of a
quarter-point interest rate cut by the Fed on Wednesday at
22.5%, with a 70.2% probability of a rate cut at its next
meeting in July.
The dollar's rise was in part pushed by a falling euro
EUR= , which was down 0.29% at $1.119 after European Central
Bank chief Mario Draghi said policymakers will provide more
stimulus if inflation does not pick up.
At a speech in Sintra, Portugal, Draghi said the ECB could
still cut rates, adjust its guidance, offer mitigating measures
to counter the unwanted side effects of negative rates, and also
had "considerable headroom" for more asset purchases.
"That is twice in less than two weeks he has warned about
the risks to price stability but today we got the clearest hint
that a rate cut and/or QE2 could happen," said Kenneth Broux, a
currency strategist at Societe Generale in London.
"Draghi's words that the council will deliberate 'in the
coming weeks' is implicitly a reference to the next council
meeting in July or September."
With benchmark euro zone interest rates already in negative
territory and inflation expectations well below central bank
forecasts, markets perceived Draghi's comments as dovish.