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The dollar slipped on Monday against its major peers as a wave of M&A deals lifted the mood in global equity markets and investors looked ahead to an event-packed week which includes a Fed meeting and the appointment of a new Japanese premier.
The single currency had spiked to a one-week high above $1.191 after Thursday's European Central Bank meeting, before easing back as policymakers talked it down the next day. It was trading around $1.187 on Monday.
The UK parliament was preparing to debate a draft bill which the government has admitted breaches the terms of its EU divorce treat. The currency nevertheless firmed 0.6% versus the dollar following its weakest week since March. The gain was partly down to the dollar index, which slipped 0.2% after firming for two weeks straight.
This week's US Federal Reserve meeting will be its first since Chairman Jerome Powell unveiled a policy shift towards greater tolerance of inflation, effectively pledging to keep interest rates low for longer.
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ING Bank said in a note to clients that the "soft" Fed policy looks largely priced in following Powell's unveiling of the new inflation targeting approach, and that more positive news would be needed to push cyclical currencies higher and the dollar lower.
"With fragile equity markets and risk sentiment, it is unlikely to happen this week, in our view," the bank said.
"This suggests a range-bound dollar index this week."
Speculators trimmed net short dollar positions for the second straight week to $32.67 billion, according to Reuters calculations and Commodity Futures Trading Commission data. That's off nine-year highs of $33.68 billion in late August
Analysts at Standard Chartered said there was a risk the Fed would disappoint dollar bears.
"Having set aside yield curve control as a near-term policy option, the FOMC does not seem to have an operational consensus on how to use the balance sheet," they told clients. "This may disappoint investors."
The data showed net euro longs inched higher but remained off record highs touched a few weeks ago.
Sterling rose against the dollar on Monday, as plans to ease coronavirus lockdowns in the UK and signs the economy may bounce back due to pent-up demand kept the currency just below the $1.27 touched late last week.
Upbeat readings on US business activity and home sales help push global equities and the dollar higher on Friday, counteracting earlier stock declines in Europe. The dollar’s gain put it on track to break an eight-week losing streak.
Global equities wavered and the dollar fell to two-year lows on Tuesday as the broad US stock market briefly scaled new peaks on better-than-expected corporate earnings but soon retreated on an economic outlook burdened by the coronavirus pandemic.
US underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week to support a slowing economy.
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