European Market Update:

Published: 5/9/2007

The dollar was a touch weaker against the euro and yen on Wednesday as investors braced for policy announcements from central banks in the United States, Britain and the euro zone.

The Fed is expected to keep rates at 5.25 percent Wednesday afternoon but investors will look to the policy statement and whether officials address signs of slower U.S. growth to gauge the chances of rate cuts later this year.

The Bank of England, meanwhile, is seen raising rates to 5.5 percent on Thursday, while the European Central Bank is expected to keep rates on hold at 3.75 percent but signal a rate hike of its own in June.

Midmorning, the euro was trading at $1.3558 , up 0.1 percent from late Tuesday. The dollar was 0.25 percent weaker at 119.70 yen.

Analysts said investors were generally taking risk off the table ahead of the announcements, a strategy that was providing a modest boost for the yen.

Investors often borrow the low-yielding yen to fund purchases of higher-yielding assets, a strategy known as the carry trade.

Sterling was up 0.4 percent at $1.9970, boosted by speculation the BoE could surprise markets by hiking rates by a half percentage point to 5.75 percent, instead of a quarter point rise to 5.5 percent.

First up, though, will be the Fed. At its last meeting in March, the Fed scrubbed the statement of a reference to possible future rate hikes and acknowledged that economic data had been mixed but stressed that price pressure remained the

biggest policy concern.

A spate of soft economic data has since helped push the dollar to record lows against the euro and 26-year lows against sterling, and a statement that dwells on signs of slower growth would likely renew a dollar decline.

The euro zone and UK economies are still showing signs of growth at a time when the U.S. economy is slowing, increasing the relative appeal of the euro and sterling over the dollar.