Dollar treads water, wary of Greek default risks as Fed awaited

By Lisa Twaronite

TOKYO (Reuters) - The dollar was steady in early Asian trade on Tuesday, with traders adopting a cautious stance as they wait for the outcome of the U.S. Federal Reserve's two-day policy meeting that takes place amid the backdrop of a looming crisis in Greece.

A bright employment report last month as well as an uptick in wage inflation have heightened speculation that the Fed may begin raising interest rates as early as September. That has kept investors abuzz as they look to policy clues from Fed Chair Janet Yellen's post-meeting news conference on Wednesday.

However, a hawkish policy statement is far from a given. U.S. data overnight showed that industrial production unexpectedly fell in May as manufacturing and mining activity remained weak, a sign that a strong dollar continued to constrain economic growth.

"While we also believe that the Fed will lay the foundation for tightening, it would be remiss to not discuss the downside risks for the dollar," Kathy Lien, managing director of FX strategy for BK Asset Management, wrote in a note to clients. 

The dollar's recent rapid gains over the past few weeks give the U.S. central bank some leeway to be flexible, she said, and policymakers could opt to remain cautious in light of the fact that both the International Monetary Fund and World Bank have said they believe the Fed should delay hiking rates until 2016.

If they chose to deliver it, a "dovish message would be a big surprise that could send the greenback tumbling as much as 2 percent this week," Lien said.

Against the yen, the dollar was nearly unchanged on the day at 123.43 yen .

The euro edged down about 0.1 percent on the day to $1.1273 . Against the Japanese currency, the euro was steady at 139.14 yen , as investors wavered between hope and despair over Athens' inability so far to reach a deal with its lenders to avert a default.

Greece and its creditors hardened their stances on Monday after the collapse of weekend talks, prompting Germany's EU commissioner to say the time had come to prepare for a "state of emergency".

The euro zone finance ministers' meeting on Thursday now takes on a greater role for potentially breaking the deadlock, as Greece faces a 1.6 billion euro repayment to the IMF at the end of this month.

But Greek Finance Minister Yanis Varoufakis said in a German newspaper interview that he is not planning to present new reform proposals at a Eurogroup meeting later this week, according to interview excerpts published on Tuesday.

Greece's government denied a German newspaper report on a euro zone plan that involves Athens imposing capital controls this weekend if it fails to reach a deal with creditors this week, a government official told Reuters on Monday.

(Editing by Shri Navaratnam)