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Dollar Down On Greenspan Comments

The dollar fell against the euro and pared gains versus the yen on Monday after ex-Federal Reserve chief Alan Greenspan warned investors to expect "a few years of dollar weakness."

The remarks from Greenspan, who was addressing a business conference in Tel Aviv, greased the dollar's slide against the euro. A burst of buying in the European currency flushed out any short positions established on Friday when November U.S. jobs data proved strong enough to trigger a dollar rally.

Earlier in the day, the greenback had clung to those gains as investors prepared for another warning on inflation from the Federal Reserve, which convenes on Tuesday for its last policy meeting of the year.

"We're seeing a little retracement from Friday," said Ronald Simpson, managing director of global currency analysis for Action Economics in Tampa, Florida.

"There are people that went long dollars ... and I think some of those longs have come undone ahead of the FOMC tomorrow and obviously, one of the bigger catalysts was Mr. Greenspan, but I'm not reading too much into it," he said.

Greenspan added that he believed it was "imprudent to hold everything in one currency," a nod to the ongoing trend of central bank reserve diversification into other currencies, which traders took as a clear sell-signal.

"What we're hearing from Greenspan is reinforcing the view that the dollar has further to fall. We got positive news on Friday, but it's certainly not enough to reverse the trend," said Greg Salvaggio, vice president of trading at Tempus Consulting in Washington D.C.

The Federal Open Market Committee is widely expected to leave rates unchanged at 5.25%, and given the note of caution from a number of Fed officials recently on inflation, there is a risk that the post-meeting statement will echo this concern once more.

The euro hit a session high of $1.3263, according to EBS data, after Greenspan's comments, having broken a three-day losing streak against the dollar.

The dollar pared its gains versus the yen, which had come under pressure across the board earlier in the day thanks to data last week that showed soft patches in the Japanese economy and a wire report suggesting the Bank of Japan will delay any rate hikes until early next year.

The yen hit record lows against the euro and neared eight-year lows against the British pound.

"The broad-based weakness in the economic numbers coming out of Japan are a risk to the BoJ hiking next week but the move back higher in USD/JPY since Friday morning from just below 115.00 to above 117.00 seems to be taking a lot of that into account," said ABN AMRO strategist Dustin Reid in a note to clients.