By Myra P. Saefong, MarketWatch
LONDON (MarketWatch) -- The dollar weakened against the yen and euro Monday, easing back after a climb to a two-month high last week as traders mulled the timing of future rate hikes by the U.S. Federal Reserve.
News Monday that Dubai received $10 billion in financing from Abu Dhabi to pay part of the debt held by conglomerate Dubai World and its property unit Nakheel helped alleviate concerns over potential growth in sovereign debt defaults, and also contributed to weakness in the dollar. Read more on Abu Dhabi's financing for Dubai.
But this week's Federal Open Market Committee on Wednesday took center stage, as traders worried that more dovish language from the central bank policy committee would weigh on dollar sentiment.
"The key highlight this week will be the FOMC meeting," analysts at Credit Suisse wrote in a research note issued Monday. "While the [U.S. dollar] might be supported heading into the meeting as expectations for earlier Fed tightening rise, we think the risk for the USD is that the FOMC surprises on the dovish side," they said.
The FOMC begins a 2-day meeting on monetary policy Tuesday in Washington.
The dollar was down against its Japanese counterpart Monday afternoon, buying 88.51 yen, compared with 89.23 yen late Friday in North American trading. The euro was changing hands at $1.4632, up from $1.4623 late Friday.
The dollar index (DXY 76.49, -0.12, -0.16%) , a measure of the greenback against a basket of currencies, fell 0.1% to 76.86.
An uptick in consumer sentiment bolstered expectations for a U.S. economic recovery Friday, lifting the dollar to its highest level in two months. See Friday's Currencies report.
"Interest rates will become increasingly important in driving currencies over the course of the next few months, but if anyone thinks that the Fed will shift its stance at this week's FOMC meeting, they are likely to be off the market," Mitul Kotecha, head of global forex strategy at Calyon, said in a note to clients.
"No doubt the Fed will note the recent improvement in economic data but this is highly unlikely to result in a change in the overall stance towards policy," he said.
