LONDON: The dollar dipped on Monday, pulling away from 14-year highs hit last week on expectations of a faster pace of U.S. monetary tightening, as investors booked profits and lightened hefty bets on the currency into the end of the year.
It had surged after a policy statement from the Federal Reserve on Wednesday, threatening parity with the euro as markets moved to price in the chance that rates will be hiked three times in 2017.
But as a two-week period got under way in which many traders will be away from their desks on holiday, meaning thin liquidity, the euro edged up and the dollar index fell 0.3 percent to 102.65, almost 1 percent below Thursday's peak of 103.56.
"Nothing has fundamentally changed in terms of where clients see the dollar in 2017, but this is about derisking," said Citi's head of G10 currency strategy in London, Richard Cochinos.
"You basically just reduce what are your consensus and your largest positions, which happen to be a long dollar, a short yen, and a long dollar, a short euro."
Cochinos said a speech by Fed Chair Janet Yellen due at 1830 GMT would be watched for any hint that last week's Fed meeting was interpreted by markets as more hawkish than had been intended.
Against the yen, the dollar fell as much as 0.9 percent, before recovering a touch to trade down half a percent on the day by 0830 GMT at 117.35 yen. The yen was boosted by data showing Japan's export performance improved strongly in November.
Dollar net long positions were little changed in the week through Dec. 13, affirming a trend in place since the Nov. 8 election of Donald Trump as U.S. president on the expectation of more inflationary infrastructure and fiscal spending, data showed on Friday.
Net shorts on the yen, meanwhile, rose to their largest since early December last year.
The Bank of Japan was scheduled to begin a two-day policy meeting on Monday, at which it is expected to maintain its 10-year government bond yield target as the weaker yen helps Japan's economic prospects, a Reuters poll showed on Friday.
"The speed of the yen's weakening was likely much faster than the BOJ anticipated," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank in Tokyo.
"While no major changes are expected from the meeting, some tweaks to policy are possible, to adjust to the new market situation," she said.
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