Major Currency Pairs

(Reuters) - The dollar dropped for a third session against the yen on Tuesday, hitting a six-week low, as the greenback continued to be weighed by lowered expectations that the Federal Reserve would start reducing its bond purchases in the near term.

The U.S. currency has been weakening in the aftermath of below-forecast U.S. jobs data last Friday that prompted some analysts to push back expectations of when the Fed would begin slowing its bond-buying stimulus of $85 billion per month.

The Fed's asset-purchase program, called quantitative easing, is negative for the dollar as it is tantamount to printing money.

Expectations that the Bank of Japan, at its monthly policy meeting this week, will refrain from embarking on more stimulus measures also favored the yen.

"While the weakness of the dollar is pronounced against the yen, it is a broad sell-off that has more to do with Fed policy than BoJ policy," said Charles St-Arnaud, foreign exchange strategist at Nomura Securities in New York.

"This is symptomatic of how trading has been all summer, with so much volatility and people looking to lock in profits whenever they can," he said.

The dollar fell as low as 97.51 yen, its lowest since June 26. It last traded down 0.6 percent at 97.74 yen.

The Bank of Japan's next policy meeting is on Wednesday and Thursday, and BofA Merrill Lynch, in a global research report, said they do not expect it to make any changes to its policy framework.

The BoJ might need to consider additional easing if downside risks increase for the economic growth and inflation outlook, if doubts arise about the effects of its quantitative and qualitative easing, and if overseas economies falter and the yen appreciate, the bank said.

The euro, meanwhile, gained against the U.S. dollar on Tuesday on news of a surge in factory output in Britain and Germany, extending a string of recent upbeat data that perhaps points to an early end to the euro zone's 18-month recession.

While the euro zone single currency was buoyed by strong growth at factories in Germany - Europe's largest economy - and in Britain - the euro zone's biggest trade partner, most analysts believe the region significantly lags the kind of recovery under way in the United States.

The euro rose as high as $1.3323 and last traded at $1.3304, up 0.4 percent on the day.

The dollar briefly pared losses versus the yen and euro after data showed the U.S. trade deficit narrowed sharply in June to its lowest in more than 3-1/2 years as imports reversed the prior month's spike, suggesting an upward revision to second-quarter economic growth.

The dollar index was down 0.2 percent on the day at 81.687, according to Reuters data.

The Australian dollar, meanwhile, also rose against the dollar, gaining after the Reserve Bank ofAustralia cut interest rates as expected and gave no clear indication it would ease policy further, disappointing some who had positioned for it.

The RBA lowered its cash rate by a quarter percentage point to a record low of 2.5 percent, a cut which was fully factored in. Some had geared up for a 50-basis-point cut and some form of forward guidance or pledge to keep rates low, analysts said.

A squeeze in short positions saw the Australian dollar rise 0.7 percent to $0.9006, pulling away from a three-year low of $0.8848 struck on Monday. It has risen for two days and was on track for its best daily performance in two weeks.

While the Aussie last traded at $0.8962, up 0.4 percent on the day, some view the Aussie's gains as temporary.

The Aussie is likely to be pressured in the medium term by slowing growth in China as well as a strengthening U.S. dollar, Valentin Marinov, G10 currency strategist at Citi told the Global MarketsForum, a Reuters online community.

In the very near term though, he said, the Aussie could squeeze a bit higher. That was primarily because plenty of investors and speculators had built large bets against the currency and needed to book profits, analysts said.