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FOREX-Euro continues bounce; Fed eyed for interest rate clues

* Euro gains against dollar for second straight day

* Traders taking risk off table ahead of Fed policy meeting

* BOJ stands pat on policy, market reaction limited

By Ahmed Aboulenein

LONDON, March 17 (Reuters) – The euro rose for a second day against the dollar on Tuesday as investors awaited the start of a two-day U.S. Federal Reserve policy meeting that will test expectations of a mid-2015 rise in U.S. interest rates.

The single currency had come under pressure after the European Central Bank began a bond-buying programme last week that will pump more than one trillion euros of newly created money into the euro zone economy.

But the euro won some relief on Monday after weaker-than-expected U.S. manufacturing, industrial output and housing data pushed down U.S. debt yields and cooled the dollar’s advance.

The U.S. currency’s surge since early March has been driven by growing speculation that the Fed’s Open Market Committee (FOMC) will point towards a June rate rise by dropping a pledge to be “patient”.

The dollar has gained around 20 percent against a basket of major currencies over the past six months as investors bet the Fed will be the first major central bank to raise rates since the financial crisis. But some reckon the Fed cannot ignore how much that rise reduces pressure on inflation.

“Our view is that the Federal Reserve will indeed drop the word ‘patient’ from the statement but it will be very cautious nonetheless,” said Alvin Tan, currency strategist at Societe Generale in London.

“The profit-taking continues from yesterday following the poor U.S. data that we had and the market is being cautious ahead of the FOMC meeting.”

Having hit a 12-year low of $ 1.0457 at the start of the week, the euro was up a third of a percent at $ 1.0603. The dollar was around 0.1 percent lower against a basket of major currencies.

Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi UFJ in London, said investors were keen to take risk off their books ahead of the Fed meeting.

“If you’ve been short euro over the past week, you’ve had a good week, and why would you bother running the risk into what is a difficult event to predict?”

The dollar was up 0.05 percent to 121.28 yen, stuck in a relatively narrow range since advancing to an eight-year high of 122.04 on March 10.

The Bank of Japan concluded its two-day policy meeting on Tuesday, at which the central bank stood pat on monetary policy and maintained its massive stimulus. Market reaction was limited because the outcome was as expected.

(Additional reporting by Jemima Kelly in London; Editing by Mark Trevelyan)

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