Dollar rises off five-week low before Fed talks, U.S. data
* Dollar bounces from five-week low before Fed meeting and major data
* Average daily currency turnover rose in April from six months earlier
* Volatility prices indicate big currency moves may lie ahead
* Event risk eyed ahead of ECB, BOE meetings
The dollar rebounded from a five-week low against a basket of major currencies in choppy trade on Monday as investors positioned ahead of this week's key U.S. economic data and U.S., euro zone and British central bank policy meetings.
The greenback, which investors had been selling over the last three weeks, slumped earlier in the global session on expectations the Federal Reserve will reiterate its commitment to keep benchmark U.S. interest rates low for some time.
"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.
The dollar index, which tracks the greenback against a basket of six currencies, fell as low as 81.499—the lowest since June 20— before recovering to last trade flat at 81.654. The euro slipped 0.1 percent to trade at $1.3264, erasing earlier gains as it failed to pierce $1.33, a closely watched level since it was a trigger for options contracts.
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.
Wednesday will also see the first reading of second-quarter U.S. gross domestic product data, with a Reuters poll forecasting 1 percent growth.
The U.S. currency had rallied in May and June when Fed Chairman Ben Bernanke first indicated that the Fed may start reducing monetary stimulus for the economy. Less stimulus could eventually produce a rise in interest rates, potentially making the dollar more attractive for investors.
Dollar gains, however, started fading in recent weeks following a string of soft U.S. economic data and comments from Bernanke that the Fed will not cut back on its bond purchases as long as growth remains sluggish and inflation is not a threat.
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.
A sharp jump in foreign exchange volatility prices, meanwhile, indicates that major currency pairs may see big moves ahead, according to David Rodriguez, quantitative strategist at DailyFX in New York.
"It's particularly worth noting that short-term forex market volatility prices have surged near their highest levels of the year, while longer-dated volatility prices have remained stable," he said. "We often see such huge divergences near key market turning points, and indeed, we're on the lookout for price extremes in the U.S. dollar and Japanese yen, in particular."
Meanwhile, average daily currency turnover in the world's largest foreign exchange centers rose in April from six months earlier, with North America and the UK posting record-high volumes, a biannual survey from major central banks released on Monday showed.
In North America, the average daily volume in over-the-counter foreign exchange instruments, including spot, outright forward, foreign exchange swap, and options reached $1.0 trillion in April, according to the New York Federal Reserve-sponsored Foreign Exchange Committee.
U.S. home price data is due for release on Tuesday, which will precede reports on private-sector job hiring and planned layoffs on Wednesday and Thursday, respectively. On Friday, the U.S. monthly 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 so boost the dollar.
"We'll tread lightly in the week ahead—limiting exposure ahead of top-tier economic event risk," DailyFX's Rodriguez said. "If this is truly the start of a dollar reversal, there may be ample opportunity to latch onto dollar strength for the foreseeable future."
The dollar hit the day's peak against the yen of 98.33 yen in the North American session following a smaller-than-expected drop in U.S. pending home sales for June. The dollar last traded down 0.4 percent at 97.84 after dropping to 97.61, its lowest since June 27, according to Reuters data.