Dollar rebounds after market volatility seen limiting U.S. rate hikes

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The dollar index was briefly positive Monday afternoon, after it edged lower against major currencies earlier on Monday on worries that heightened market volatility caused by an oil price slump and turmoil in credit markets could limit the number of U.S. interest rate hikes and dampen the greenback's allure.

The dollar index has been down 2.5 percent so far this month, much of it due to profit-taking as investors have fully priced in the first U.S. interest rate increase in nine years.

The Federal Reserve is expected to deliver that policy move on Wednesday, with investors now focused on the pace of tightening after that.

However, the continued decline in oil prices due to a prolonged supply glut and more recent turbulence in the U.S. high-yield market with the closure of three credit funds have raised the possibility that the Fed would be even more cautious.

"Any prolonged period of market volatility, weaker commodities, or worries about emerging markets could limit the outlook for rate hikes next year and undermine the appeal of the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

Market anxiety has therefore boosted the stock of traditional safe havens such as the yen and Swiss franc, while the oil drop has hammered the commodity-linked Canadian dollar , which dropped to an 11-1/2 year trough against its U.S. counterpart.

In afternoon trading, the dollar rose 0.03 percent against the yen at 120.90 yen and was up 0.31 percent against the Swiss franc at 0.9859 franc.

The euro, on the other hand, rose 0.09 percent to $1.0997.

The euro also benefited from reduced appetite for risk. Investors who had held carry positions in which they borrow euros in order to sell them and buy a higher-yielding currency bought them back.

The Australian dollar rose 0.79 percent to US $0.7237, and the New Zealand dollar gained 0.8 percent to US$0.6756.

Against the Canadian dollar, the greenback was down 0.15 percent at C$1.3735 after hitting C$1.3677, its highest since June 2004.

Earlier, China's yuan hit a 4-1/2-year low against the U.S. dollar in onshore trading after the country's central bank again lowered the yuan midpoint rate. That followed Friday's announcement of a new trade-weighted index, which some viewed as a green light for further yuan devaluation.