The dollar rose against the euro on Monday as traders showed reluctance to extend the US currency's losses ahead of a speech by US Federal Reserve Chairman Alan Greenspan later this week.
Greenspan delivers his semi-annual monetary report to the US Congress on Tuesday and Wednesday. Traders will scrutinise his comments for clues on the future path of US interest rates. Higher US interest rates tend to enhance the attractiveness of dollar-based assets for global investors.
"If there is anything in the testimony that would change the Fed's measured approach toward removing its accommodative policy, then the dollar could move higher, which is unexpected," said Ashraf Laidi, chief currency analyst at MG Financial Group in New York.
"The Fed will surely not change its approach of a measured change in monetary policy. As a result, it should keep the dollar under pressure," Laidi added.
The euro rose to $1.2461 per dollar in the Asian session, its highest since early March, before trading at $1.2435, down 0.1 percent by late-afternoon in New York.
The US currency also regained its footing against sterling with the pound trading down 0.2 percent at $1.8684 and the dollar trading up 0.19 percent against the Swiss franc at 1.2281 francs.
However, the dollar traded down about 0.5 percent against the Japanese currency at 108.19 yen.
Market data showing speculative flows behind much of the dollar's recent decline also made investors hesitant to sell the dollar.
The market will also watch the German ZEW investor survey index, due on Tuesday at 5:00 am EDT (0900 GMT), which is expected to underline doubts about the quality of Germany's economic recovery. Analysts polled by Reuters predict a fall to 47.00 in July from 47.4 in June.
Recent US economic indicators have signalled that the recovery of the world's largest economy has lost some steam, prompting markets to scale back expectations of future interest rates rises and sell the dollar.
Friday's US data, which showed core inflation weaker than expected and foreign demand for US assets abating, followed disappointing retail sales and industrial production data.
Given recent signs of a pause in the US recovery, markets are eager to see whether Greenspan reiterates his pledge of "measured" monetary tightening.
The Fed has repeatedly signaled that any future interest rate hikes will be gradual. The market has taken this as meaning quarter-point hikes following June's increase to 1.25 percent, which was the Fed's first in four years.
Fed Bank of Minneapolis President Gary Stern and Bank of Boston President Cathy Minehan said on Monday that the US economy is on track for solid growth and the Federal Reserve still intends to raise interest rates at a moderate pace. The dollar's reaction was muted.
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