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The dollar gained on Monday as many investors prepared for the Federal Reserve to reiterate its concern about rising US inflationary pressures when it announces its interest rate decision on Wednesday.
The policy-making Federal Open Market Committee (FOMC) is widely expected to hold it benchmark interest rate steady at 5.25 percent for the third meeting in a row, so the statement that accompanies the decision will remain the focus of the market's attention. Many investors expect the Fed to repeat its concern about building inflationary pressures and have bought dollars aggressively in the past few weeks.
Speculators "have been reducing their short-dollar positions or their long-euro positions, and it's only in the last week or so that we're beginning to see real money do the same thing," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman.
The dollar came under fire toward the end of last week after the release of data showing a surprising fall in regional manufacturing activity. Much of Monday's trading was centered on unwinding some of those shorter-term bets against the greenback.
"Given the dollar's weakness last week, there's a little unwinding of that ahead of the FOMC," said Ron Simpson, director of currency research at Action Economics in Tampa, Florida. "The Fed is not going to do anything as far as rates are concerned. We expect the Fed to express concern about the inflation outlook and all this is just supportive of the dollar," he added.
By late afternoon in New York, the euro was down 0.5 percent at $1.2547, near key support in the $1.2540/50 area. A fall to $1.2530 would pave the way for a fresh downside test of the psychologically important $1.2500 level, traders said.
"The dollar has succeeded in holding key technical support against the euro ... and so that's basically prompting the dollar to recoup some of last week's losses," said Alex Beuzelin, senior market analyst at Ruesch International in Washington.
The dollar was up 0.5 percent against the yen at 119.31 yen, and rose 0.6 percent against the Swiss franc to 1.2668 francs. Sterling fell 0.5 percent to $1.8731.
Some analysts said softening oil prices and the slight widening in spreads in the dollar's favour following a rise in global short-end interest rates also contributed to the greenback's rally.
US oil futures were down 0.7 percent at $58.90 a barrel on Monday, even after top exporter Saudi Arabia said it would curb November supply after an Opec agreement to cut output.
On the interest rate front, a Reuters poll published last week showed that 14 out of 21 US primary bond dealers predicted the Fed's next move would be a rate cut - although views were split on the timing. The remaining seven believe the US economy will rebound from a third-quarter slowdown and generate enough inflation pressures to persuade the Fed to push rates higher. Globally, traders are pricing in higher interest rates in other key economic regions as strength in equity markets dull the allure of safe-haven bonds.

Copyright Reuters, 2006

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