NEW YORK: The dollar on Monday fell from an 18-month high reached the previous session, ahead of the Federal Reserve's policy meeting this week that will likely result in an increase in interest rates but signal a more cautious tone for the economy next year.
The Fed ends its two-day policy meeting on Wednesday and is expected to tighten for a fourth time in 2018. All eyes, however, will be on signals about the pace of further tightening and the Fed's sense of how the economy is holding up amid a US-China trade conflict and global financial market volatility.
"Investors are increasingly convinced the Fed will begin putting the conditions in place for a pause in the rate hike cycle," said Karl Schamotta, chief market strategist at Cambridge FX in Toronto.
Last week, the dollar enjoyed its best weekly performance since September, reaching an 18-month high on Friday. The euro, on the other hand, weakened last week after the European Central Bank cut inflation and growth forecasts and struck a cautious tone about the outlook for the world economy.
In mid-morning trading, the dollar index, which measures the greenback's value against a basket of other major currencies, slipped 0.3 percent to 97.177. A bearishness in the dollar has started to emerge in speculative market positioning, in which short-term investors cut net long bets on the dollar last week from a near two-year high, according to Commodity Futures Trading Commission data.
The euro, meanwhile, rose 0.3 percent on Monday, to as high as $1.1353 even though EU statistics office Eurostat earlier lowered November's inflation reading. The euro fell as low as $1.1266 last week.
Weaker-than-expected economic data from China and Europe last week sent investors toward the perceived safety of the dollar.
"We continue to expect that euro/dollar will remain range bound but the euro will underperform on crosses in the near term," Goldman Sachs analysts wrote in a note to clients, citing the ECB's downbeat assessment and signs that street protests in France were beginning to weigh on business sentiment.
The offshore Chinese yuan, which has fallen significantly in 2018, was little changed at 6.8988.
Investors are now looking to a major speech by President Xi Jinping on Tuesday to mark the 40th anniversary of China's market reforms and opening up. China is also scheduled to hold its annual Central Economic Work Conference this week.
The dollar fell 0.4 percent versus the yen to 112.94, while sterling strengthened 0.2 percent to $1.2606, buoyed by the dollar's move downward.
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