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Dollar rises to 7 week high, Aussie drops on RBA

TOKYO - The dollar rose to a seven-week high against a basket of major currencies on Tuesday, drawing support from a sharp drop in oil and commodity prices that hit the Australian dollar.

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The Aussie extended its slide, striking a four-month low against the U.S. currency after the Australian central bank on Tuesday opened the door for cutting interest rates, prompting investors to see a move as soon as September.

As expected, the Reserve Bank of Australia kept interest rates on hold at 7.25 percent, but said in a statement that scope to move towards less restrictive policy is increasing, paving the way for future rate cuts.

'The statement convinced everyone in the market the RBA is highly likely to lower interest rates in the future rather than boosting them,' said Hiroshi Yoshida, a forex trader at Shinkin Central Bank.

Before the statement was announced, some market participants had bet the central bank's next move would be a rate hike given stubbornly high inflationary pressures.

The dollar benefitted from a fall in oil and commodity prices, as well as slower economies elsewhere that prompted investors to sell other currencies against the U.S. unit.

The dollar index, which measures the U.S. currency's performance against a basket of six currencies, rose 0.3 percent to 73.685 and reached as high as 73.699, the highest since mid-June.

Investors also braced for the Federal Reserve's policy decision later in the day with the focus on the central bank's post-meeting statement for clues on the monetary policy outlook.

'The key to the impact on the market is how the Fed's statement will change expectations for a monetary tightening outlook,' said analysts at JPMorgan Chase Bank in Tokyo in a note to clients.

Some upbeat U.S. economic data on Monday generated optimism about the prospects for the broader economy while unexpected surges in consumer prices raised the possibility of higher interest rates by the end of the year.

The Fed is widely expected to keep benchmark interest rates steady at 2.0 percent in the face of higher risks of inflation and threats to economic growth.

The euro fell 0.3 percent to $1.5530 a tad above a six-week low around $1.5510 hit last week as investors awaited more central bank meetings later this week including the Bank of England and European Central Bank.

The dollar's performance against the euro has been closely correlated to the direction of oil prices, with cheaper oil generally supporting the U.S. currency.

U.S. crude oil futures fell around $1 to trade near a three-month low of $119.50 hit the previous day.

Against the yen, the euro dropped 0.4 percent to 167.97 yen.

The dollar was steady at 108.20 yen in sight of a six-week high of 108.39 yen hit last week.

The Aussie dropped 0.6 percent to $0.9239 after sliding as low as $0.9234, its lowest level since mid-April, as hedge funds continued to liquidate long positions, traders said.

The New Zealand dollar was under pressure as Finance Minister Michael Cullen said on Tuesday that the country is not immune to the global financial storm.

The New Zealand dollar slid 0.4 percent to $0. staying near 10-month lows struck around $0.7250 late last week.