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Dollar recovers on doubts ECB can strengthen euro further

The U.S. dollar rebounded from a near seven-month low against the euro on Monday as traders doubted that any European Central Bank shift in policy stance could strengthen the euro further, while dollar repurchases after Friday's steep losses also helped the greenback.

ECB policymakers are set to take a more benign view of the economy when they meet on Thursday and will even discuss dropping some of their pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters last week.

Complacency that the ECB will be less dovish has left the euro vulnerable to disappointment if the central bank does not satisfy those expectations, analysts said.

Traders also bought back the dollar ahead of the ECB meeting after a softer-than-expected May U.S. employment report on Friday hit the currency and stoked doubts that the Federal Reserve would raise interest rates in the second half of this year.

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The euro was last down 0.24 percent against the dollar at $1.1252 after hitting $1.1285 on Friday, its highest since Nov. 9.

"It has been very well-flagged that (the ECB) will be pivoting their language around the balance of risks and the forward guidance, and that's increasingly priced in," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.

The dollar index, which measures the greenback against a basket of six major rivals, was last up 0.1 percent at 96.82 after hitting a roughly seven-month low of 96.654 Friday.

Friday's decline in the dollar index, of about 0.5 percent, was its steepest in two weeks.

"The U.S. dollar index firmed off of Fridays seven-month trough overnight as investors squared up their positions," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, in a research note.

Sterling, on a roller-coaster ride driven by diverging opinion polls ahead of Thursday's national election, recovered after an attack on pedestrians in central London on Saturday drove a brief drop in early Asian trade. Sterling was last up 0.3 percent against the dollar at $1.2921.

The dollar hit a near seven-month low against the Mexican peso of 18.3325 pesos after the ruling Institutional Revolutionary Party (PRI) fended of a leftist challenge in a key state election, seen as a prelude to next year's presidential elections.