Dollar falls on shifting Fed expectations

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The dollar fell from a seven-week high against the yen on Thursday as U.S. bond yields declined and as investors speculated the Federal Reserve will take a more cautious approach toward reducing its stimulus next week.

The euro was little changed against the dollar, recouping losses it made after data showing an unexpected decline in U.S. jobless claims and a contraction in euro zone industrial output.

Analysts said the dollar could remain under pressure going into the Fed's meeting next Tuesday and Wednesday. Uncertainty about the timing and pace of Fed action grew after last week's disappointing U.S. August employment report.

Data on Thursday showing U.S. initial jobless claims fell sharply last week further clouded the picture as much of the decline appeared due to technical problems in claims processing. Before the Fed meeting, U.S. retail sales and consumer prices will be closely watched.

The dollar lost 0.4 percent to 99.44 yen, retreating from a seven-week high of 100.60 yen hit on Wednesday, according to Reuters data.

The euro was down 0.1 percent at $1.33, hitting a session low of $1.3259 after the U.S. claims data.

Reflecting nervousness before the Fed meeting, euro/dollar and dollar/yen one-week implied volatilities—a gauge of how sharp price swings will be in the near term—shot up.

Against the yen, the euro lost 0.6 percent to 132.23 yen.

The dollar index, which measures the greenback versus a basket of six currencies, was flat at 81.51, having hit a two-week low of 81.358, the weakest since Aug. 28.

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