The dollar extended losses against the euro on Tuesday as the market awaited the outcome of a U.S. Federal Reserve policy meeting on Wednesday and a record $104 billion in U.S. debt issuance this week.

Analysts said a stabilisation in equity markets after U.S. shares tumbled overnight helped the euro to recover after losses the previous day, with European shares holding in positive territory

Concerns about reserve diversification away from U.S. assets also weighed on the dollar after Moody’s said one risk to the U.S.’ triple-A rating is if the dollar is challenged as the main reserve currency.

It said the U.S. rating is safe unless the government is unable to bring debt back down.

Investors will be watching closely to see what the U.S. central bank says on Wednesday about the economic outlook and its debt-buying programme, with markets nervous of the possibility of dovish comments.

“If people want to position themselves ahead of the Fed meeting they are more likely to be short dollar, and that may have helped the euro,” Standard Bank currency strategist Steve Barrow said.

At 1154 GMT, the euro rose 0.9 percent against the dollar to $1.3982 , while the dollar index fell 0.7 percent to 80.311.

Barrow said the Fed statement was unlikely to be overly hawkish and that the market was more likely to respond in the event of a dovish Fed statement. Equally people would be more likely to sell the dollar in the event of a poor U.S. auction than to buy the currency if the auctions go well.

He added, however, that liquidity was very thin, causing currency moves to be more exaggerated.

The market will also be keeping a close eye on the European Central Bank’s first ever one-year refinancing operation on Wednesday, aimed at getting banks lending again.

“Tomorrow’s ECB auction will shed important light on the funding needs of euro zone banks and the prospects for monetary policy,” CMC Markets’ Ashraf Laidi said in a note to clients.

FED EYED

The Fed is expected to hold the target range for its benchmark federal funds rate steady at zero to 0.25 percent, and probably to make no shifts in its asset purchase programme.

Meanwhile, analysts believe the dollar is likely to stay under pressure ahead of the U.S. bond auctions, where low demand could raise concerns about how the country will finance its huge deficits.

“People are wary of buying dollars until the U.S. bond auctions are out of the way,” Stockholm-based SEB currency strategist Johan Javeus said.

Against the yen, the dollar fell 0.5 percent to 95.40 yen , not far from an earlier three-week low just below 95 yen.

The euro cut earlier losses against the yen to trade up 0.4 percent at 133.45 yen , having earlier fallen as low as 131.41 yen on trading platform EBS, its lowest in a month.

The euro earlier showed little reaction to provisional purchasing managers’ surveys that showed recovery stalling in the euro zone services sector but manufacturers faring better as they ran stocks of goods to new lows.

The market was awaiting U.S. existing home sales data at 1400 GMT and in particular for a U.S. Treasury auction of $40 billion in two-year government debt.

LONDON, June 23 (Reuters)