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Dollar braces for dovish Fed, gloomy US data

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The U.S. dollar will remain under pressure this week on expectations that the Federal Reserve will signal stimulus remains intact for longer at its two-day policy meeting, according to CNBC's latest market survey of currency traders, analysts and strategists.

Technical indicators,however, suggest a short-term bounce from oversold conditions may be in store for the greenback after falling to near nine-month lows.

According to CNBC's latest poll of currency market sentiment, 52 percent (12 out of 23 respondents) believe the U.S. dollar will slide this week. About 44 percent (10 out of 23) say the dollar will gain while one respondent expects prices to trade around current levels.

Expect more weakness for US dollar: Pro

Currency markets appear to have largely priced in the likelihood of the Fed scaling back asset purchases in March, and many believe this week's October Fed meeting won't move the major pairs meaningfully. Still, some warned Fed policymakers have the potential to surprise.

(Read more: Hilsenrath to Wall Street: You don't know Fed)

"FOMC may be a bit of write-off but there are risks of some dovish language tweaks," said Sean Callow, Senior Currency Strategist, Westpac Bank. Furthermore, this week brings additional risks of "downside data surprises, especially with manufacturing ISM," Callow said.

Kathy Lien managing director at BK Asset Management warned this week's Fed meeting may not be the non-event that the some in the market believe it may be: "The Fed will surprise the market in a very big way if they suggest there is even a modicum of a possibility that tapering could happen this year. On balance, Fed officials have not been overly dovish and not every FOMC voter has said that tapering will be delayed."

The week's scheduled U.S.economic releases – including September retail sales and the October ISM Manufacturing Index -- are likely to be consistent with a softer economy, providing another hurdle for dollar bulls, CNBC poll respondents said.

(Read more: Stock-market bullsface hurdles in the week ahead)

However, some strategists argue that the greenback may correct higher based on technical trading charts after the closely-watched dollar Index dipped below 79.00. "DXY should bounce next week," Ed Ponsi, the Managing Director of Barchetta Capital Management said on Friday. "It's purely technical...79.00 is huge support."

A survey showing German business morale unexpectedly fell for the first time in six months tipped the euro off a two-year high against the dollar on Friday and helped the dollar Index edge up 0.1 percent to 79.236, off an earlier near nine-month low of 78.998.

"This 79.00 level is the line in the sand," said Matt Fanning, CIO and Fund Manager at Fanvestments in Providence, Rhode Island who has a 'bearish' recommendation on the dollar."If the dollar can hold, then I would revise my bearish stance, for at least a short term technical bounce. I still think the dollar is a 'sell' versus a 'buy' until Q2 next year."

The Intercontinental Exchange Inc. traded Dollar Index tracks a basket of six major counterparts of the greenback and the euro represents a near 58 percent weighting, making the gauge prone to swings in the single European currency.

(Read more: Euro is'too strong, too German': French minister)

Another catalyst that may resuscitate the dollar may come from China and the risk of another spike in short-term money market rates as the authorities consider tightening liquidity in a bid to cool credit expansion and control inflation as property prices rise.

"There is likely to be a bounce in the USD in the near term and it may arise through risk aversion if the Chinese rates continue to rise and equity markets fall," said Emma Lawson,the Sydney-based senior currency strategist at National Australia Bank.

China's benchmark seven-day repo contract, which has been on a steady slide since Oct. 9, rose steeply in last Wednesday morning's session with quotes as high as 4.55 percent, up more than a full percentage point from the previous final closing quote, Reuters reported. The moves sparked a rush into safe havens including the Swiss franc, Japanese yen and even the U.S. dollar.

"Dollar beating has stretched too far and is already in the exhaustion category," said Vinay K.Agarwal of the Agarwal Group. "A snap back could be the result of hawkish commentary from the Fed as well as China fears coming in. Shibor (Shanghai Interbank Offered Rate) spikes are whispering to us that something is about to go wrong."