October 17, 2018 / 11:37 AM / 10 months ago

FOREX-Dollar extends gains before Fed minutes; pound tanks

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Oct 17 (Reuters) - The dollar rose for a second consecutive day on Wednesday as firmer stock markets fuelled demand for the greenback, though the release of U.S. Federal Reserve minutes later in the day kept gains in check.

The British pound was the biggest loser against the dollar, with lower than expected UK inflation data weighing on sterling.

"The dollar is trapped in a sideways range and we need more confirmation on the data front to push it higher from these levels," said Bernd Berg, a global macro and foreign exchange strategist at Woodman Asset Management in Switzerland.

Against a basket of its rivals, the dollar rose a quarter of a percent but it remains about 2 percent below its mid-August peak.

However, moves were broadly muted in currency markets, in contrast to big gains in global stocks and drops in government bond yields in markets such as Italy.

Markets will be looking for clues on the dollar's direction and the path for U.S. interest rates from minutes of the Fed's September meeting, due for release later on Wednesday.

Interest rate futures are pricing in a 77 percent likelihood that the Fed will raise rates in December, according to the CME Group's FedWatch Tool. Two more increases are likely next year.

Sterling fell by nearly half a percent after consumer price data for September came in at an annual rate of 2.4 percent versus forecasts of 2.6 percent.

Forecast-beating U.S. company earnings improved the mood on world equity markets as Asian and European shares put aside concerns over global growth and trade and took their cue from Wall Street's best one-day rise in eight months.

"The dollar has been strongly correlated to risk appetite for much of this year, but in the last few days we have seen this correlation loosening a bit, suggesting markets need more strong economic data to push the dollar higher," said Manuel Oliveri, an FX strategist at Credit Agricole in London.

However, some market analysts warned against buying into the dollar's strength, saying financial conditions appeared to be tightening globally.

Cross-currency basis swaps in euros, yen and sterling -- money market gauges of offshore dollar liquidity -- have widened in recent weeks, suggesting that the Fed's rate hikes have cut into the availability of overseas dollars.

"Risk caution is warranted ... the replacement of Fed liquidity has come at the expense of tightening liquidity conditions outside the U.S.," Morgan Stanley strategists said.

On Wednesday the euro traded a quarter of a percent lower at $1.1542, down 0.2 percent. On Tuesday it reached $1.1622 - its highest since Oct. 1 - before giving up gains.

Reporting by Saikat Chatterjee Editing by Larry King and David Goodman

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