March 20, 2019 / 8:39 AM / 3 months ago

FOREX-Dollar gains on trade war jitters before Fed

* Fed to confirm pause as FX volatility plunges

* U.S.-China trade talks hit a snag

* Brexit still in focus for BoE as labour market heats up

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

By Tom Finn

LONDON, March 20 (Reuters) - The dollar rose on Wednesday, attracting safe-haven bids after reports of further tension in U.S.-China trade negotiations, but its gains were slight, with caution expected from the Federal Reserve at its policy meeting later in the day.

Volatility in foreign exchange markets has plummeted due to a dovish shift by major central banks including the U.S. Federal Reserve.

The negative impact on the dollar from the pause in the Fed’s interest-rate-hiking cycle has been blunted somewhat by a cautious European Central Bank faced with a struggling euro zone economy.

The Fed is due to make its rate announcement at 1800 GMT on Wednesday and is expected to keep its benchmark overnight interest rate unchanged.

Bets on an interest rate cut have increased after weaker-than-expected manufacturing data on Friday.

Despite the gloomy outlook, the dollar on Wednesday gained against the Australian dollar the Canadian dollar and the Japanese yen.

That was partly due to its appeal as a safe-haven asset, analysts said, pointing to a Bloomberg report published late on Tuesday that said some U.S. officials expressed concern that China was pushing back against U.S. demands in trade talks.

The Aussie dollar, a proxy for China risk because of Australia’s dependence on Chinese demand for its exports, slipped a quarter of a percent to $0.7070.

Against a basket of key rival currencies, the dollar was 0.1 percent higher at 96.454 after hitting its lowest level since March 1 at 96.291 in overnight trading.

Most currencies remain within well-trodden trading ranges before the Fed decision.

Some analysts said the dollar might not decline significantly on the Fed meeting since investors have already priced in the central bank scaling back its interest rate outlook.

“The markets look to be very much positioned in expecting a benign FOMC outcome confirming a continued pause,” said MUFG’s head of European market research, Derek Halpenny.

On Wednesday, the euro was a shade lower against the dollar at $1.1344.

More positive signs were evident in Germany as a survey by the ZEW research institute indicated the mood among German investors improved more than expected in March, as a potential delay to Britain’s exit from the European Union helped lift sentiment.

Sterling was 0.3 percent lower at $1.3220. It had pared gains overnight on concerns that British Prime Minister Theresa May’s request for delaying Brexit was running into complications with the European Union. (Additional reporting by Daniel Leussink in Tokyo)

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