AUD

SYDNEY (Dow Jones)--The Australian dollar rose Tuesday amid quiet news flow, but dealers were merely treading water ahead of a U.S. Federal Reserve policy meeting, the outcome of which could determine near-term sentiment.

The Federal Reserve Open Market Committee isn't expected to alter policy but market participants will be looking for whether its language suggests a third round of quantitative easing remains an option.

"Any hints that Bernanke is backing away from QE3 would likely be interpreted as USD-positive," said NAB FX Strategist Emma Lawson.

"However, bear in mind that it was only the last meeting that the Fed pushed back its [interest] rate hike guidance to 'late 2014.' So it may be too early to expect the Fed to give any ground on this," Lawson said.

At 0511 GMT, the Australian dollar was trading at US$1.0555 from US$1.0520 late Monday, and Y86.583 from Y86.58.

The currency broadly ignored soft home loans numbers and a dip in business confidence.

Housing-finance approvals in Australia fell a seasonally adjusted 1.2% in January from December, the Bureau of Statistics said. And National Australia Bank's monthly business confidence index fell to +1 point in February from +4 points in January, though business conditions rose 1 point to +3 points.

"The latest figures suggest that the economy is largely running on the spot with new home loans going backwards and businesses lacking the confidence to ramp up activity," said Craig James, chief economist at CommSec.

Joseph Capurso, currency strategist at Commonwealth Bank of Australia expects the Australian dollar to trade at EUR0.8500 by the middle of 2012 largely because of interest rate differentials, compared with EUR0.8014 at 0543 GMT.

"The two year spread on government bond yields between Australia and Germany is currently very high and supportive of AUD/EUR. We expect the yield spread to move further in Australia's favour in coming months," Capurso said in a research note.

On the flip side, a strategist at Westpac Bank expects the Australian dollar to lose ground against the single currency.

"The case is growing for AUD/EUR having finally topped out with its failed attempts last month above 0.8200," strategist Sean Callow wrote in a research note.

"Since we expect both the Australian dollar and euro to lose ground versus the U.S. dollar, the scale of decline should be limited, but with notable European risk hurdles cleared and positioning a significant weight on the pair, AUD/EUR looks a sell above 0.81, sighting 0.78 multi-week," Callow wrote.