Dollar modestly higher in thin summer trading; upside limited

NEW YORK: The dollar was little changed to slightly higher on Monday in thin summer trading, with the greenback's upside potential hampered by expectations the Federal Reserve will cut interest rates at next week's policy meeting.

Investors expect the Fed to reduce its key rate by 25 basis points and make another cut in September.

Foreign exchange markets were quiet on Monday and volatility low ahead of major central bank policy decisions next week. The European Central Bank also holds a meeting next week, with investors expecting a dovish statement.

Money markets have priced in an ECB rate cut of 10 basis points in September and another one in March. The ECB's meeting on July 25 may reinforce those expectations.

Forecasts for dovish moves by both the Fed and ECB have kept euro/dollar stuck in a narrow range for weeks.

"Until we get the news out of the G7 central banks later in this month and later into the summer, we are likely to remain rather range-bound and relatively quiet," said Brad Bechtel, managing director, Jefferies in New York. "Even then, we all know what to expect, more or less."

In mid-morning trading, an index that tracks the dollar against a basket of six other major currencies was slightly higher at 96.867.

The dollar was little changed versus the yen at 107.865 .

The euro was flat at $1.1266, trading within the recent range of $1.14 to $1.11.

Investors are more bearish on the euro, since US Treasury yields look set to remain among the highest in developed markets despite future Fed rate cuts, analysts say.

Some analysts, however, are surprised the euro is not gaining given that the market has priced in Fed easing.

"For the world's most-traded and least-exciting currency pair, a dovish Fed, a weak-dollar president and a hint of global economic optimism, 'ought' to mean euro/dollar rallies," said Kit Juckes, FX strategist at Societe Generale.

"If it (the euro) can't stage a move back to $1.14 in the next week or two, what on earth could make it rally?"

Elsewhere, the Australian dollar, the currency most sensitive to Chinese news, hit a more than one-week high on stronger-than-expected economic data from China.

China's industrial output rebounded in June from a 17-year low in May, while June retail sales surged 9.8% from a year earlier.

The Aussie was last up 0.1% at US$0.7031 against the US dollar, while China's offshore yuan was up 0.1% at 6.8742 yuan per dollar.