Dollar near 1-mth lows before US factory data

TOKYO, Nov 1 (Reuters) The dollar hovered near one-month lows against the yen and the euro on Wednesday after weak business activity data for the U.S. Midwest reinforced market expectations the Federal Reserve will keep interest rates steady for a while.

Dealers said that more data showing softness in the economy could further sour sentiment for the dollar.

Ahead of much-anticipated monthly jobs data at the end of the week, market participants were awaiting figures on U.S.

manufacturing in October, due from the Institute for Supply Management at 1500 GMT.

''A weak reading in the ISM could put more selling pressure on the dollar as investors may further trim long dollar positions,'' said Takashi Kido, forex manager at Sumitomo Trust and Banking.

The dollar was little changed on the day at 116.95 yen by 0600 GMT, hovering near 116.62 yen hit on Tuesday, its lowest since late September.

The U.S. currency fell broadly on Tuesday after the National Association of Purchasing Management-Chicago's barometer of business activity in October fell to the lowest since August 2005. U.S. consumer confidence also slipped slightly in October.

In Asian trade, dealers said that demand for dollars from Japanese importers would likely keep the currency supported above the mid-116 yen region.

The euro was flat at $1.2762, near a one-month high of $1.2783 struck on Tuesday. The single currency changed hands at 149.25 yen, off a record high of 150.80 yen hit at the end of last week.

The Canadian dollar weakened 0.4 percent against the U.S.

dollar to C$1.1263 after Canadian Finance Minister Jim Flaherty surprised investors with plans to tax income trusts, a move that analysts said could hit Toronto stocks later in the day. For details, see Investors continued to snap up high-yielding currencies, taking the Australian dollar to a near six-month high and the New Zealand dollar to an 8-1/2-month peak.

DEPENDS ON RATES The dollar index, which measures performance against a basket of currencies, fell 0.8 percent in October, the largest monthly fall since May due to heightened market expectations that the Fed will keep rates at 5.25 percent for some time.

A pause by the Fed -- or even a rate cut -- could eat into the dollar's yield advantage against rival currencies like the euro and the yen.

''Dollar sentiment is definitely sliding,'' said Mitsuru Sahara, senior trader at Bank of Tokyo-Mitsubishi UFJ Bank.

''Weak readings in the ISM and jobs figures could increase speculation that the Fed could cut rates by March.'' He said that an ongoing chill towards the dollar could spur more unwinding in yen carry trades.

Carry trades, in which investors use low-yielding currencies like the yen to fund investments in higher yielding assets, have long battered the yen with Japanese short-term rates near zero.

The yen garnered support from a Bank of Japan outlook report on Tuesday that bolstered expectations the central bank is preparing to lift rates to 0.5 percent from the current 0.25 percent by early next year at the latest.

BOJ Governor Toshihiko Fukui on the same day repeated that he could not rule out the possibility of a rate rise this year.

Still, Japanese Prime Minister Shinzo Abe said in a Financial Times interview published on Tuesday that Japan had yet to outgrow deflation and he hoped the BOJ would help to support the economy through monetary policy.

A Reuters poll of market participants and analysts showed that most respondents expect a rate rise to come in the first quarter of 2007, most likely in January.

REUTERS CS KP1320