LONDON: The dollar slipped from a seven-month high against a basket of currencies on Wednesday as markets awaited minutes of the Federal Reserve's recent policy meeting which could reinforce expectations of a rate hike next month.
But there was a degree of wariness building in the long dollar trade, amid expectations that the Fed could flag concerns about the currency's recent strength.
The dollar index has risen 6.3 percent in the past month as odds for an interest rate hike in December moved from around 30 percent to 66 percent. Similarly, the Fed's broad-based dollar trade-weighted index has pushed higher.
Traders said there was some caution in early deals in Europe amid reports of gunfire and explosions in Paris, where French police hunting a Belgian Islamist militant suspected of masterminding last week's attacks surrounded a building.
The dollar index was lower at 99.501 after touching 99.745 on Tuesday, its highest since mid April. The dollar was also down 0.1 percent against the safe-haven yen and the Swiss franc.
"It will be a case of range-trading going into the Fed minutes. We could see some positions being pared, with the dollar having risen in the past few weeks," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"The market is also mindful that the Fed may refer to the dollar's strength either implicitly or obliquely and that its rise has been tightening monetary conditions. That should make any hikes a rather slow and gradual process."
The dollar's dip saw the euro regain ground. It rose to $1.0670, having dropped to a seven-month low of $1.0630 on Tuesday. The euro has been gradually losing ground on expectations of more monetary easing by the European Central Bank in December.
Early this week, it took a fresh lurch lower, hurt by the potential harm the Paris attacks could do the euro zone economy. France is bound to overshoot its European Union budget deficit target as it boosts security spending in the wake of attacks, Prime Minister Manuel Valls said.
"Although French government bonds are unlikely to be sold immediately on this -- the ECB is a steady buyer of debt -- it is still a fiscal issue with negative consequences for the euro in the long run," said Ayako Sera, a senior market economist with Sumitomo Mitsui Trust in Tokyo.
"That said, the ECB's monetary policy firmly remains an immediate concern for the euro," Sera added.
Expectations of further central bank stimulus grew on Tuesday after ECB's chief economist and executive board member Peter Praet told Bloomberg he was aware of present downside risks, which may have increased in light of the events in Paris.
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