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Dollar tentative as Fed pause eyed in busy central bank week

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By Rae Wee

SINGAPORE (Reuters) – The dollar steadied marginally on Monday but remained near multi-week lows against some major currencies as traders stayed on guard ahead of monetary policy decisions due this week from several central banks, including the Federal Reserve.

The U.S. currency was pinned near a one-month low against the British pound and the Aussie at $1.2568 and $0.6740, respectively, with a holiday in most of Australia making for thinned trade.

Policy meetings of the Fed, the European Central Bank (ECB) and the Bank of Japan (BOJ) will set the tone for the week, as markets seek clues from policymakers on the future path of interest rates.

U.S. May inflation data is also out on Tuesday as the Fed kicks off its two-day meeting.

“Any USD move should remain restrained and recent ranges should still hold ahead of FOMC,” said Christopher Wong, currency strategist at OCBC. “Perhaps a softer (inflation) print can negate USD’s bullish pressure.”

Money markets are leaning towards a pause from the Fed when it announces its interest rate decision on Wednesday, according to the CME FedWatch tool, expectations that sent Wall Street surging to a 13-month high on Friday as risk sentiment improved.

The U.S. dollar index clocked a loss of nearly 0.5% last week, its worst weekly drop since mid-April, and was last 0.09% higher at 103.62.

Conversely, a clear majority of economists polled by Reuters expects the ECB to hike its key interest rate by 25 basis points this week and again in July, before pausing for the rest of the year as inflation remains sticky.

The euro slipped 0.08% to $1.0740 in Asia trade, after having risen 0.4% last week, its first weekly gain in roughly a month.

“Outside of the decisions that the central banks make at this meeting, what will be of particular interest is their forward guidance,” economists at ANZ wrote in a note.

“Central banks have raised rates aggressively over the past 12-15 months and given the lagged effects with which monetary policy affects demand, are central banks teeing up for a pause, following the RBNZ’s example?”

The Reserve Bank of New Zealand last month signalled it was done tightening after raising rates to the highest in more than 14 years at 5.5%, ending its most aggressive hiking cycle since 1999. That sent the kiwi tumbling 2.7% in May.

In afternoon trade on Monday, the kiwi was last 0.11% lower at $0.6123, though was not too far from an over two-week high of $0.6138 hit on Friday.

Elsewhere, the Japanese yen steadied at 139.43 per U.S. dollar.

The BOJ is expected to maintain its ultra-loose monetary policy this week and a forecast for a moderate economic recovery, as robust corporate and household spending cushion the blow from slowing overseas demand, sources told Reuters.

“We change our BOJ call to no YCC revision at this week’s meeting,” said Societe Generale’s Jin Kenzaki, referring to the central bank’s controversial yield curve control policy.

“However, we still think that the BoJ could widen the range at its July meeting.”

Data out on Monday showed that Japan’s wholesale inflation slowed for a fifth consecutive month in May because of sliding fuel and commodity prices, a sign cost-push pressure that has driven up consumer inflation may be subsiding.

(Reporting by Rae Wee; Editing by Muralikumar Anantharaman & Simon Cameron-Moore)

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