Dollar weak as traders bet on a dovish Fed

NEW YORK (Reuters) - The U.S. dollar edged lower against a basket of major currencies on Tuesday as concerns over the strength of the U.S. economy and expectations that the Federal Reserve will prove accommodative at its meeting this week weighed on the greenback.

The dollar index, which measures the greenback against six major currencies, fell 0.15 percent to 96.375, hovering close to a more than two-week low touched overnight.

Traders are focused on the Federal Reserve, which kicked off its two-day policy meeting on Tuesday, for clues about the likely path of U.S. borrowing costs and whether the central bank will affirm its commitment to “patient” monetary policy, analysts said.

Investors will particularly look to see whether policymakers have sufficiently lowered their interest rate forecasts to more closely align their “dot plot,” a diagram showing individual policymakers’ rate views for the next three years, analysts said.

"What we are seeing is the market positioning for potentially a more dovish tone tomorrow," said Minh Trang, senior currency trader at California's Silicon Valley Bank.

More detail on a plan to stop cutting the Fed's holdings of nearly $3.8 trillion in bonds is also expected, analysts said.

Earlier on Tuesday, data showed new orders for U.S.-made goods rose less than expected in January and shipments fell for a fourth straight month. That follows data on Friday that showed U.S. manufacturing output fell for a second straight month in February.

"The softer inflation readings, disappointing job growth and the soggy manufacturing output reinforces ideas that the central bank is out of the picture for the coming months," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.

The Australian dollar, which has advanced in recent days - helped by the U.S. dollar's weakness - was down 0.22 percent after minutes of the Reserve Bank of Australia's March policy meeting expressed concern about the housing market.

Volatility in foreign exchange markets is at its lowest in five years and analysts say recent decisions by the Fed and other major central banks are contributing.

"Central banks are like a fleet of planes on the runway and they are all kind of circling around the tarmac and no one really wants to take off," said Trang.

Sterling was up 0.18 percent at $1.3278. It pared early gains on concerns that British Prime Minister Theresa May's request for postponing Brexit was running into complications with the European Union.

(Reporting by Saqib Iqbal Ahmed; Editing by Susan Thomas and Dan Grebler)

By Saqib Iqbal Ahmed