FOREX-Dollar at 3 1/2-week low as China woes seen restraining Fed

(corrects para two to say China is world's second-largest economy)

* China seen making Fed wait longer before hiking rate

* Euro reclaims ground above $1.14, eyes mid-Sept high

* Sterling up 0.3 percent before wages and jobs report

By Anirban Nag

LONDON, Oct (HKSE: 3366-OL.HK - news) 14 (Reuters) - The dollar traded near a 3 1/2-week low against a basket of currencies on Wednesday as more signs of weakness in China bolstered expectations the U.S (Other OTC: UBGXF - news) . Federal Reserve will wait longer before raising interest rates.

The Australian dollar stayed below two-month highs after subdued inflation data from China underpinned a growing view that the world's second-largest economy was losing momentum. China is a huge export market for Australia and the Australian dollar is used as a proxy for investments to China.

China's price data showed annual consumer inflation slowed more than expected to 1.6 percent in September, below market expectation of 1.8 percent, from 2.0 percent in August.

The inflation number, coming a day after data showed Chinese imports fell 20 percent in September, suggested the economic picture in China was cloudy and will be a factor constraining the Fed's ability to raise interest rates.

"The inflation data today and a sharp decline in imports yesterday are depressing risk sentiment," said Niels Christensen, currency strategist at Nordea.

"A clouded outlook for China can used as an argument by the Fed to postpone a rate hike. In any case we are seeing more and more Fed members arguing against a rate hike."

Fed Governor Daniel Tarullo told CNBC television he does not expect the economy to be ready for a rate hike this year, while St. Louis Fed President James Bullard said an October rate rise is unlikely.

The dollar index fell 0.25 percent to 94.523, its lowest since Sept 18. A prime beneficiary of the dollar's weakness was the euro, which rose 0.3 percent to $1.1417, with its Sept. 18 high of $1.1460 seen as a likely target.

Against the yen, the dollar dipped 0.1 percent on Wednesday to 119.60 yen, near Tuesday's low of 119.55, its lowest since Oct. 2. The yen was hampered by expectations that the Bank of Japan could unleash stimulus at the end of this month.

The Australian dollar slipped to $0.7240, taking it further away from Monday's two-month peak of $0.7382.

Meanwhile, sterling rose 0.3 percent to $1.5290, recovering from a steep drop on Tuesday when negative inflation data hit sentiment. On Wednesday, wages and labour market data will be released and robust data is likely to add to a debate whether the Bank of England will pip the Federal Reserve in raising rates.

"The pound has had a disappointing start to the week due to a soft consumer price inflation release but we do not think it makes sense to chase sterling lower from here," analysts at BNP (Paris: FR0000131104 - news) Paribas said in a note. "In contrast to consumer inflation, wages are telling a different story of building price pressures." (Additional reporting by Hideyuki Sano; Editing by Tom Heneghan)