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Dollar steady ahead of Fed meeting; low chances of June rate cut


By Kate Duguid

NEW YORK (Reuters) - The U.S. dollar was roughly unchanged on Monday, hovering near the two-week high set earlier in the session as investors reconsidered how dovish the Federal Reserve is likely to be at this week's policy meeting.

Broader currency markets were quiet, as traders hesitated to put on large positions before the Fed's two-day meeting, a meeting of European Central Bank policymakers in Portugal and the Bank of England's interest rate decision on Thursday.

"It wouldn't surprise us to see a bit of volatility going into these meeting but ultimately you're going to see people taking more of a wait-and see approach," said Charles Tomes, portfolio manager at Manulife Asset Management.

Expectations of a rate cut at the Fed's June 18-19 meeting have fallen to a probability of 20.8%, according to CME Group's FedWatch tool. But bets for monetary easing at its July meeting remain elevated, with markets pricing in a 67.9% chance of a 25 basis point cut.

Slow jobs growth in May, dovish comments from Federal Open Market Committee members and a slate of weak inflation data last week pushed rate-hike expectations up.

"It's probably warranted that you need somewhat of a rate cut priced in. We think the pendulum has swung a little too far, too fast in the short term where the market has gotten ahead of itself pricing in cuts," said Tomes.

The dollar index hit a two-week high of 97.603 on Monday but was last flat on the day at 97.573. The euro was 0.07% higher at $1.122 as investors awaited policymakers speeches at the European Central Bank meeting in Sintra, Portugal, and Tuesday's euro zone inflation data.

Against the yen, the dollar was slightly stronger, last up 0.06% to 108.62.

Sterling slid as low as $1.254, its weakest since January, heading for a 2019 low. Investors worry Boris Johnson, the front-runner to replace Prime Minister Theresa May, could put Britain on a path towards a no-deal Brexit.

The Bank of England on Thursday will consider tightening monetary policy. Although BoE chief economist Andy Haldane has said the central bank is nearing a time for the UK to raise rates, no major changes should be expected until Brexit negotiations have finished, said Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets.

"We expect the (Monetary Policy Committee) to retain it's tightening bias to some degree, though we wouldn't rule out a few modest tweaks to acknowledge the worsening global backdrop and weak economic conditions in the euro zone."

(Reporting by Kate Duguid and Tommy Wilkes; Editing by Nick Zieminski)

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