Dollar holds gains before Fed meeting - MarketWatch

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By William L. Watts & Deborah Levine , MarketWatch

The dollar pared gains as the trading session wore on and U.S. equities backed away from the lows of the day.

/quotes/comstock/21o!x:seurusd cur_EURUSD 1.47 , -0.01 , -0.49%

"The tone appears to be one of consolidation as the market focuses on this week's key events," said currency strategists at Brown Brothers Harriman in a research note. "The U.S. dollar is continuing to gain ground as markets pare back 'risk-on' trades."

The single currency changed hands at $1.4690, down from $1.4720 in North American trade late Friday.

The dollar rose to 92.09 Japanese yen, up from 91.43 yen Friday.

The dollar Index /quotes/comstock/11j!i:dxy0 ( Index Future - Spot Price"> DXY 76.35 , +0.47 , +0.61% ) , a measure of the greenback against a trade-weighted basket of rival currencies, rose to 76.719, up from 76.446.

A holiday in Japan curtailed volume in Asia, while a lack of major economic data kept activity under wraps in Europe, strategists said.

The dollar remained higher after the Conference Board said the U.S. recession is bottoming out and a recovery is near. The private group's Index of leading economic indicators rose 0.6% last month. Analysts surveyed by MarketWatch predicted the index would rise 0.7% in August. See more on leading indicators.

Fed chatter

Meanwhile, ideas the Fed's rate-setting Open Market Committee could opt Wednesday to signal it's ready to begin outlining an exit strategy from its massive monetary-stimulus efforts helped pressure equity markets, spurring support for the dollar, analysts said.

U.S. stock indexes stayed under pressure on Wall Street, with the Standard & Poor's 500 Index /quotes/comstock/21z!i1:in\x ( SPX 1,071 , +6.01 , +0.56% ) off 0.4%, following lower markets in Europe. The greenback has tended to rally when economic fears are on the rise and to fall when investors are more inclined to take on risk. See Europe Markets. See Market Snapshot.

"Given the recent improvements in the housing and manufacturing sectors along with the rise in consumer spending and equity prices, the Fed has plenty of reasons to be upbeat," Kathy Lien, director of currency research at Global Forex Trading, wrote in an email. "If they become more optimistic, it would initially help to drive the dollar higher but given the schizophrenic nature of the currency market, a rise in risk appetite may erase the dollar's gains."

Also under discussion is the central bank's mortgage-debt buying programs, which many credit with keeping mortgage rates low for borrowers and supporting the struggling housing sector. Some analysts expect those purchases to be slowed down to last longer, much like the Fed declared for its Treasury-buying program last month. Read more in Bond Report.

Still, dollar weakness has been exacerbated in recent weeks amid signs the greenback is taking on a role as a funding currency for carry trades, in which investors sell a low-yielding currency and purchase higher-yielding currencies.

Also this week is a summit of the leaders of the Group of 20 Global economic powers, which gets under way Thursday in Pittsburgh.

Nervousness before that meeting has also spurred traders to exit pro-risk trades, said Boris Schlossberg, director of currency research at GFT.

"If the talk out of the G20 actually turns into some concrete policy action, the news of further government regulation of capital markets could cast a pall over risk assets and precipitate a profit taking sell off that many analysts have been anticipating for weeks," Schlossberg said.

William L. Watts is a Reporter for MarketWatch in London. Deborah Levine is a MarketWatch Reporter, based in New York.

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