The euro rose against the dollar on Monday in a volatile but illiquid session with investors reluctant to make large bets in case the US Federal Reserve shows no sign this week of changing its easy monetary policy. With many markets closed for the Easter holiday and no major US economic reports on the calendar, the Fed's meeting on Tuesday and Wednesday will be the key event risk this week as traders try to gauge the direction of US policy.
Market participants will look to the post-meeting news conference by Fed Chairman Ben Bernanke on Wednesday - the first regularly scheduled news briefing by a Fed chief in the US central bank's 97-year history - to see how the Fed plans to exit from its ultra-loose policy.
If the Fed surprises the market and turns more hawkish it will pose a risk to the sizeable amount of dollar shorts in the market. Currency speculators pared bets against the US dollar for a fourth straight week, according to data from the Commodity Futures Trading Commission released Friday, but were still net short to the total of $24.36 billion.
The dollar index, which measures the currency's value against six major currencies, was little changed at 74.024. However, many traders say it could test a three-year low of 73.735 hit last week. A break of that level could open the way for a test of the record low of 70.698 touched mid-July 2008, according to Reuters data. If Bernanke indicates that the Fed's accommodative policy may continue for the foreseeable future, the dollar will likely see selling pushing the euro/dollar toward the $1.5000 psychological barrier, strategists said. "The bond and currency market reaction is still an unknown and a significant risk," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
The Fed is expected to confirm its $600 billion asset purchase programme, known as QE2, will end as scheduled in June. The euro was last at $1.4576 up 0.1 percent on the day. The Australian dollar touched its highest level since the currency was floated in December 1983, before falling to trade at $1.0721, down 0.2 percent on the day. Against the yen, the dollar fell 0.2 percent to about 81.70 yen. Dollar/yen has weakened from roughly 85.50 since early April with recent support seen just below 82, Scotia's Sutton said.