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FOREX-Dollar sinks as equity market mood lifts, Fed in view

* Suga set to succeed Abe as Japan PM, focus turns to new cabinet

* Dollar under pressure ahead of Fed policy meeting outcome on Wed

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E (Updates throughout, updates prices, adds analyst comment)

LONDON, Sept 14 (Reuters) - The dollar slipped on Monday against its major peers as a wave of M&A deals lifted the mood in global equity markets and investors looked ahead to an event-packed week which includes a Fed meeting and the appointment of a new Japanese premier.

The UK parliament was preparing to debate a draft bill which the government has admitted breaches the terms of its EU divorce treat. The currency nevertheless firmed 0.6% versus the dollar following its weakest week since March.

The gain was partly down to the dollar index, which slipped 0.2% after firming for two weeks straight.

This week’s U.S. Federal Reserve meeting will be its first since Chairman Jerome Powell unveiled a policy shift towards greater tolerance of inflation, effectively pledging to keep interest rates low for longer.

“There will be pressure on the Fed to back up the new policy goals with some action,” said MUFG strategist Lee Hardman, noting that inflation remained well below target.

“Expectations are they could strengthen forward guidance, possibly by saying rates will be on hold for 3-4 years,” said Hardman, who remains bearish on the greenback.

ING Bank said in a note to clients that the “soft” Fed policy looks largely priced in following Powell’s unveiling of the new inflation targeting approach, and that more positive news would be needed to push cyclical currencies higher and the dollar lower.

“With fragile equity markets and risk sentiment, it is unlikely to happen this week, in our view,” the bank said.

“This suggests a range-bound dollar index this week.”

Speculators trimmed net short dollar positions for the second straight week to $32.67 billion, according to Reuters calculations and Commodity Futures Trading Commission data. That’s off nine-year highs of $33.68 billion in late August

Analysts at Standard Chartered said there was a risk the Fed would disappoint dollar bears.

“Having set aside yield curve control as a near-term policy option, the FOMC does not seem to have an operational consensus on how to use the balance sheet,” they told clients. “This may disappoint investors.”

The data showed net euro longs inched higher but remained off record highs touched a few weeks ago.

The single currency had spiked to a one-week high above $1.191 after Thursday’s European Central Bank meeting, before easing back as policymakers talked it down the next day.

It was trading around $1.187 on Monday.

The yen meanwhile rose 0.2% to around 105.92 yen to the dollar, a five-day high. The Bank of Japan’s meeting on Thursday is not expected to yield any policy changes but the bank may be quizzed on whether it could follow the Fed’s inflation stance.

The Reuters Tankan survey on Monday found Japanese manufacturers pessimistic for the 14th straight month in September, underlining the challenge the country’s next leader faces after the economy sank into its deepest recession ever.

Chief Cabinet Secretary Yoshihide Suga was picked to head Japan’s ruling party on Monday, meaning that on Wednesday in parliament he is set to be selected by his peers as prime minister, taking over from Shinzo Abe.

Suga has vowed to continue Abe’s policies.

“The focus is on the line-up of his cabinet as well as whether he will call a snap election,” said Minori Uchida, chief FX strategist at MUFG Bank. “He is saying he will continue and advance Abenomics, but it is questionable how much advancement he can make.”

Reporting by Sujata Rao, additional reporting by Ritvik Carvalho in London and Hideyuki Sano in Tokyo; Editing by Susan Fenton and Hugh Lawson

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