* Dollar lifts off two-year low to pause slide
* Fed and U.S. fiscal package in focus
* USD down 3.6% in July and could post worst month since
2010
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
By Tom Westbrook
SINGAPORE, July 28 (Reuters) - The dollar bounced off a
two-year low on Tuesday as selling pressure faded ahead of a
Federal Reserve meeting and as political wrangling over the next
U.S. fiscal rescue package moved closer to a conclusion.
The world's reserve currency has been tumbling since May and
was dumped in recent days as cracks in the U.S. coronavirus
recovery and crumbling yields sent investors elsewhere.
Buyers crept out of the woodwork following a pullback in the
gold price halfway through the Asian session, lending the
greenback support and pushing other majors off milestone peaks.
The New Zealand dollar NZD=D3 touched an eight-month top
of $0.6702 and then dipped back to $0.6656, while sterling
GBP= retreated from a four-month high to sit at $1.2850.
The Japanese yen JPY= weakened 0.3% to sit just below its
strongest since mid March at 105.65, and the euro EUR=EBS was
last 0.2% softer at $1.1725. The Aussie dollar AUD=D3 gave up
early gains dip 0.2 to $0.7133. AUD/
Most analysts say the reasons for the dollar's broad
decline, especially falling real yields, remain intact but that
the pace of the drop probably warranted a pause - particularly
with a Fed meeting and a U.S. spending package in the offing.
"Perhaps it is a case of the market running ahead of
itself," said Moh Siong Sim, currency analyst at the Bank of
Singapore.
On the horizon is a Fed meeting that begins later on Tuesday
and Friday's deadline for U.S. Congress to extend unemployment
benefits - both unpredictable enough to inject some nerves into
bets against the dollar.
Against a basket of currencies =USD .DXY the dollar
lifted from a two-year low of 93.492 to hit 93.918. Still, it is
down 3.6% in July and will need a stronger bounce to avoid
posting its worst month in almost a decade.
NEW TOOLS
No policy change is anticipated at the Fed meeting on
Wednesday, but investors expect to hear its super-easy outlook
reaffirmed and are speculating about a change in emphasis in the
forward guidance. One shift could be to average inflation targeting, which
would see the Fed aim to push inflation above its 2% target to
make up for years of under-shooting.
That prospect has pressed on U.S. real yields, sending the
yield on inflation-protected 10-year paper USTIPCMT10Y=RR to a
record-low -0.92% last week, where it has held. US/
But a lift in nominal yields, pushing the 10-year
US10YT=RR to a week-high 0.63% on Monday, suggests investors
could "sell the fact," even if the Fed sounds dovish.
"The (Fed) announcement may be a damp squib, or even lead to
some modest fixed income selling to take profit," said Steve
Englander, head of global G10 FX research at Standard Chartered
in New York.
A big U.S. fiscal package - currently deadlocked in
negotiations between Democrats, who have made a $3 trillion
proposal, and Republicans who have tabled a more modest $1
trillion plan - could also boost the dollar if it passes.
The current Republican plan would reduce an expanded
unemployment benefit from $600 per week to $200 at a time when
some 30 million Americans are out of work. U.S consumer confidence and manufacturing data due at 1400
GMT will also give markets the latest read on progress in the
U.S. economic recovery.
On the virus front, U.S. infection rates may be stabilising,
with a 2% drop in the number of new cases last week - but the
economic impact of curbs to restrict its spread and of job
losses are only beginning to be felt.