The U.S. dollar fell against the euro and yen on Monday as traders pared back expectations Federal Reserve Chairman Ben Bernanke would hint at tapering bond purchases this week.
The yen rebounded from a 4 1/2-year low against the dollar, with the Japanese currency drawing support from comments by Economy Minister Akira Amari that the yen's excessive strength had largely corrected and further weakness could damage Japan's economy.
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Focus is shifting to Bernanke's testimony to Congress on Wednesday after recent comments by Fed officials have fueled speculation the central bank may taper its bond purchases sooner than expected.
"We may have been moving a little bit too early," said Andrew Dilz, foreign currency trader at Tempus Inc. in Washington. "I see a continuing of this exact pace of current purchases at least through the end of the summer, which is going to put some pressure on the dollar."
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The dollar index, which tracks its value against a basket of currencies, fell 0.6 percent to 83.764, retracing from a near three-year peak set on Friday.
Speculation had grown that the beginning of the end of the Fed's massive bond-buying program —at $85 billion per month—might come sooner than many investors think if recent gains in the U.S. labor market hold.
The roughly 50 percent jump in monthly job creation since the program began has raised at least some chance the Fed could ratchet back its buying as early as next month. The central bank next meets to debate policy on June 18-19.
The dollar fell 0.8 percent to 102.31 yen, having hit a low of 102.16, according to Reuters data. Last Friday, the dollar reached a high of 103.30 yen.
The euro lost 0.6 percent to 131.84 yen and its low on Monday, at 131.02, was the lowest since May 9.
The BOJ, which begins a two-day meeting on Tuesday, is expected to keep policy unchanged but could tinker with its bond-buying plan to curb a recent rise in Japanese yields. Analysts said the yen looked set to resume weakening as Tokyo was committed to easier monetary policy.
"Any dip in dollar/yen toward 101 or 102 yen is a buy as Japanese policymakers are clear that there will be more asset purchase or quantitative easing in the longer term," said Alvin Tan, a currency strategist at Societe Generale in London.
He said short-term momentum indicators such as the 14-day relative strength index showed the dollar was overbought against the yen, hence a pullback was due.
The euro rose 0.4 percent to $1.2884, having reached a session peak of $1.2894, rebounding from a six-week low of $1.2795 touched on Friday.
But some analysts say additional gains would be limited, given strong expectations the European Central Bank will cut its deposit rate—the rate paid on surplus cash parked by banks— below zero in coming months.
JPMorgan lowered its second-quarter euro/dollar forecast to $1.30 from $1.32 to reflect a shallower U.S. downturn, slower Chinese growth and a protracted euro zone recession.
Any hint of the Fed winding down its asset purchases could add the dollar's momentum, analysts said.
"We are dollar bulls and expecting more pieces of the puzzle to fall into place—most notably serious speculation over the normalization of Fed policy, which can drive U.S. money market rates and the dollar substantially higher," Chris Turner, head of currency strategy at ING in London, wrote in a note.