Dollar drifts higher ahead of US data, Fed meeting
* Fed may bolster dovish forward guidance
* Dollar/yen falls as Nikkei slides
* Plenty of event risk: ECB and BoE meetings, major data
The dollar rose from a five-week low against a currency basket on Monday as investors bought it back ahead of a slew of U.S. economic data and central bank policy meetings this week, having sold the currency the last three weeks.
The greenback had fallen earlier in the global session on the expectation that the Federal Reserve will reiterate its commitment to keep U.S. interest rates low for some time.
The euro slipped 0.2 percent to $1.3247.
The euro zone's common currency erased short-lived gains as it failed to pierce $1.33, a closely watched level since it was a trigger for options contracts.
"The dollar recovered from oversold levels and what's happening is that the market is flattening its positions before this whole deluge of data, the Fed meeting, and other central bank events later this week," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
A basket of major currencies, known as the dollar index, on Monday fell as low as 81.499, the lowest since June 20, before recovering to trade up 0.1 percent at 81.752.
The Fed's statement on Wednesday after the U.S. central bank's two-day policy meeting will be scrutinized for fresh clues about the timetable for winding down its bond-buying program, running at $85 billion per month.
The U.S. currency had rallied in May and June when Fed Chairman Ben Bernanke first indicated that the Fed may start reducing the monetary stimulus for the economy.
Less stimulus could produce a rise in interest rates, potentially making the dollar more attractive for investors. Dollar gains, however, started to fade following softer U.S. economic data and comments from Bernanke that the Fed won't cut back on its bond purchases as long as growth remains sluggish and inflation is not a threat.
On Friday, the U.S. payrolls report will be released, with forecasts for 185,000 jobs being added in July and a dip in the jobless rate to 7.5 percent. A strong report would support the case for the Fed to start rolling back its stimulus in September and help the dollar.
"Scope for the unemployment rate to fall perhaps 0.2 percentage point in Friday's labor report might see the dollar end the week more positively," said Tom Levinson, currency strategist at ING in London.
Against the yen, the dollar fell 0.4 percent to 97.89 yen in volatile trading. It hit the day's peak of 98.33 yen in the North American session following a smaller-than-expected drop in U.S. pending home sales for June. The greenback earlier dropped to 97.61 yen, its lowest since June 27.
Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York, said the yen benefited from safe-haven flows in the wake of a 3 percent slide in the Nikkei index of Japanese stocks.
Investors were also concerned about Japan's fiscal reforms.
"(Prime Minister Shinzo) Abe ... has to walk a fine line between assuring investors that proper fiscal reforms will take place to mitigate the country's massive US$5 trillion debt, while at the same time he must pursue an aggressive expansionist policy in order to continue stimulating the economy," said Schlossberg.
ECB, BOE meet
Besides the Fed, both the Bank of England and the European Central Bank are holding policy meetings this week.
The BOE and ECB are expected to repeat or refine their respective versions of forward guidance that policy will stay loose for an extended period. This could see bids for the dollar return as the Fed is still expected to be the first major central bank to exit ultra-loose monetary policy.