LONDON - The dollar fell on Monday after posting its biggest weekly rise this year as investors took profits before data this week that will show whether the world's biggest economy is gaining momentum.
While financial markets do not expect U.S. policymakers to raise interest rates at a scheduled meeting this week, expectations are that one more rate hike before the end of the year is virtually a done deal after some recent strong data.
"The dollar is gaining some momentum and if we see more evidence of that from economic data this week, there will be more upside for the dollar, particularly against the euro," said Richard Falkenhall, senior FX strategist at SEB in Stockholm.
Net short bets on the dollar fell to their smallest in nearly three months, about $8 billion, roughly half of what they were a month ago, according to calculations by Reuters and Commodity Futures Trading Commission data released last week.
The dollar index, which tracks the currency against a basket of six major rivals, dipped 0.3 percent to 94.69 but remained not far from Friday's three-month high of 95.150.
Friday’s release of third quarter GDP data showed the economy expanded by 3.0 percent, beating forecasts, and the first time since 2014 that the U.S. economy has experienced growth of 3 percent or more for two quarters in a row.
U.S. jobs data and PMI data is due this week.
But despite the combination of strong data, expectations of more U.S. rate hikes and unwinding of excessive short bets against the greenback, some investors such as UBS are cautious about the dollar's outlook on concerns that a pickup in global growth would be a dollar negative story.
UBS reckons a pick up in global growth would mean investors will look for attractive investment opportunities in all major and emerging markets and show only a marginal interest in the slightly higher U.S. yields.
Meanwhile, the euro climbed 0.20 percent to $1.1630, erasing some of last week's losses following a drop in Spain's borrowing costs as nerves settled after a weekend poll showed Catalan secessionists may lose their majority in elections scheduled for December.
The euro, one of the best performing currencies this year, has been hit in recent weeks as a dovish European Central Bank combined with unrest in Catalonia has prompted some investors to take profits.
Elsewhere, the dollar was broadly flat against the yen to 113.66, after a three-month high of 114.45 yen on Friday.
At its two-day meeting ending on Tuesday, the Bank of Japan is set to keep intact a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year Japanese government bond yield around zero percent.
Prime Minister Shinzo Abe's victory in a lower house election this month heightened expectations the BOJ's ultra-loose policy - a key pillar of his "Abenomics" stimulus policies - will continue, as inflation remains well short of the central bank's target. Japan's core consumer prices rose 0.7 percent year-on-year in September.
(Reporting by Saikat Chatterjee; Editing by Alison Williams)