The dollar was little changed against the euro and yen on Monday with dealers mostly on the sidelines ahead of meetings of the Bank of Japan and the European Central Bank later this week.
The dollar got a brief boost after US personal income rose more than expected and consumption rebounded in September, suggesting economic growth is likely on solid footing. However, the core personal consumption expenditure price index - the Fed's favoured inflation gauge - increased by 2.4 percent last month from a year earlier, less than in August.
The market will get a better picture of the state of the US economy on Friday, when the October employment report is released. But before then, the Bank of Japan will meet on Tuesday and the European Central Bank on Thursday.
"The dollar exhibited a mixed reaction to the personal income and spending report, though ended the morning largely unchanged in front of this week's BoJ and ECB meetings and Friday's non-farm payrolls," Michael Woolfolk, senior currency strategist with The Bank of New York, said in a note. By early afternoon, the euro traded relatively unchanged on the day at $1.2730. Against the yen, the dollar slipped roughly 0.2 percent at 117.40 yen.
Richmond Federal Reserve President Jeffrey Lacker, who has voted against keeping rates steady at the last three Fed policy meetings, also helped the dollar when he said the US economy can withstand further policy tightening.
The yen maintained earlier gains as investors unwound extreme short positions in the currency ahead of the Bank of Japan's semi-annual outlook on the economy and prices and a news conference from BoJ Governor Toshihiko Fukui on Tuesday.In the day's main economic data, core US consumer prices rose 0.2 percent in September, matching expectations, as the year-on-year rate of non-food, non-energy inflation registered a strong 2.4 percent increase, a Commerce Department report showed.
August's reading, however, was revised up to 0.3 percent from the original 0.2 percent.
On Friday, the dollar sold off on news that the world's biggest economy grew just 1.6 percent on an annualised basis in the third quarter - its weakest pace in more than three years - prompting investors to step up expectations for US interest rate cuts in early 2007.
While the increase in the core PCE index slowed slightly in September, it remained above what is widely viewed as the Fed's comfort zone of 2 percent. The Fed's Lacker said in comments to reporters that the latest inflation data did not confirm that prices would come down further.
"The dollar move sort of started with Lacker and we had some follow-through" with PCE, said Lara Rhame, senior currency strategist at Credit Suisse in New York. "Friday's sell-off was overdone and some sanity is returning to the market. The PCE numbers show and Lacker shows that this obsession with a rate cut is very premature."
The euro shrugged off comments from the United Arab Emirates' central bank governor that the UAE was still considering diversifying its reserves and that the euro could account for up to 10 percent of the currency mix.
The remarks echoed those made by the UAE in the summer, and analysts also noted that the Gulf state holds relatively modest foreign exchange reserves - just $23 billion last December. Falling crude prices weighed on the currencies of oil exporters Norway and Canada. The dollar rose 0.6 percent to C$1.1260 and was up 0.4 percent to 6.5650 crowns.
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