FOREX-Dollar struggles near 4-month lows on murky outlook

By Saikat Chatterjee

LONDON, Jan 3 (Reuters) - The dollar held near a four-month low on Wednesday, having declined nearly 3 percent in the last three weeks as investors cut positions before manufacturing data and minutes of a December U.S. Federal Reserve meeting due later in the day.

Despite the biggest overhaul of the U.S. tax code in 30 years passed by U.S. policymakers in late-December, market strategists are downbeat about the prospects of the dollar in the near term.

"The key question for markets is what is the game changer for the dollar in the short term and unless we see a significant pick up in inflation, the dollar will remain on the back foot," said Viraj Patel, an FX strategist at ING in London.

The greenback was broadly flat on the day at 91.937 against a trade-weighted basket of currencies.

Other seasonal factors were also at play such as a broad decline in dollar funding requirements over the thin-year period which typically acts as a support for the greenback.

BNP Paribas strategists said dollar funding pressures as noted by cross-currency basis swaps peaked earlier than usual in December and has eased dramatically in recent days, eroding a key support.

Euro/dollar cross-currency basis swaps for three-month maturities settled at its tightest levels in nearly three years at 22.5 basis points, indicating that broad demand for dollars was muted..

The euro was flirting near a four-month high hit on Tuesday prompted by optimism over the euro zone's economy and expectations the European Central Bank will wind down its bond-buying stimulus in 2018.

The ECB board member in charge of the central bank's market operations, Benoit Coeure, said at the weekend he saw a "reasonable chance" bond purchases would not be extended beyond September.

The single currency was trading at $1.2040 after hitting a four-month high of $1.2081 on Tuesday, marking a gain of roughly 3 percent from a mid-December trough and bringing it close to a September high of $1.2092, the currency's highest level since early 2015.

Among data due later in the session is manufacturing ISM data in the United States and minutes of the December U.S. central bank meeting.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Reporting by Saikat Chatterjee; Editing by Janet Lawrence)

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