January 23, 2019 / 1:45 PM / a month ago

FOREX-Dollar soft but holds near 3-week highs

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Jan 23 (Reuters) - The dollar edged lower but held within sight of a three-week high on Wednesday as firmer stock markets and commodity currencies such as the Australian dollar prompted investors to trim their long dollar positions.

Though the Bank of Japan struck a cautious note on the outlook for global growth, investors scooped up bargains in risky assets after a rocky start to the year.

"There are a variety of factors, including some small progress in ending the U.S. shutdown as well as possible efforts to prevent a no-deal Brexit for the UK that is boosting risk appetite and pushing the dollar lower," Brown Brothers Harriman strategists said in a note.

Against a basket of its rivals, the dollar drifted 0.1 percent lower at 96.25. It hit a near three-week high of 96.484 in the previous session.

Despite the slight improvement in risk appetite, investors were wary about rushing into the dollar given the U.S. government shutdown and potential impact on growth.

U.S. Republican Senate Majority Leader Mitch McConnell said he planned to hold a vote on Thursday on a Democratic proposal that would fund the government for three weeks but does not include the $5.7 billion in U.S.-Mexico border wall funding demanded by President Donald Trump.

Major currencies were hemmed in small ranges as attention shifted to the European Central Bank, which meets on Thursday where market watchers expect it to acknowledge growing threats to the euro zone economy.

The caution from senior policymakers has emerged as economic data from China to Europe shows signs of a slowdown. Traders reacted by unwinding some of their bearish dollar bets, especially against the euro.

"The ECB will likely join its global peers in striking a cautious view on growth and that should keep the dollar supported, especially with bearish expectations on the greenback such a consensus trade," said Lee Hardman, a currency analyst at MUFG in London.

As expected, the Bank of Japan kept monetary policy unchanged. But it lowered its inflation forecast, as a larger-than-expected drop in December exports underlined the need for support for the trade-reliant economy.

On Monday, the International Monetary Fund cut its 2019 and 2020 global growth forecasts, citing a bigger-than-expected slowdown in China and the euro zone. Failure to resolve trade tensions could further destabilise the global economy, the IMF said.

The euro was broadly steady at $1.1367. Sterling rose 0.6 percent to $1.3036 after gaining 0.5 percent in the previous session.

British Prime Minister Theresa May's proposed agreement on terms for leaving the European Union was rejected by parliament last week in the biggest defeat in modern British history. Since then, lawmakers have been trying to resolve the crisis. No option has the majority support of parliament.

"The market is now completely discounting the prospect of a hard Brexit, though the political risk still remains in play and volatility is sure to ratchet higher if no clear path is visible to the market," said Kathy Lien, managing director of currency strategy at BK Asset Management. (Reporting by Saikat Chatterjee; Editing by William Maclean)

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