SYDNEY The dollar drifted off a five-week trough against a basket of major currencies on Tuesday as the euro faltered ahead of chart resistance and a three-day rally in the yen lost a bit of steam.
Trading was confined to modest position adjustments in thin markets with investors wary of taking large positions ahead of major events including the Federal Reserve policy review and key data such as U.S. non-farm payrolls due later in the week.
The dollar, which has recently rallied on the view the Fed will start to trim its stimulus later this year, has found the going rough in the past few weeks as speculation mounted the U.S. central bank will temper its tapering message.
"Markets are in a holding pattern until later this week, when the FOMC meets and non-farm payroll figures are released," analysts at Barclays Capital wrote in a note.
The standout currency was the Australian dollar, which lost a full U.S. cent as it slid below $0.9200 ahead of a speech by Reserve Bank of Australia (RBA) Governor Glenn Stevens due at 1305 GMT.
Given the slowdown in China, Australia's single biggest export market, and with much of the domestic economy still subdued, some traders are betting that Stevens will sound dovish.
"Today's speech perhaps, is set to have less of the optimism of recent years on either a relative or absolute basis, with the regional giant of China also slowing a little beyond the expectations of most forecasters," said Martin Whetton, a strategist at Nomura.
Others, however, suspect the governor will provide little guidance because the next policy meeting is just a week away.
The Aussie last stood at $0.9189, off Monday's high near $0.9300. Still, it remained some way off a 34-month trough around $0.8998 plumbed on July 12.
The U.S. dollar index.DXY edged up 0.2 percent to 81.711, having bounced off a five-week trough of 81.499 reached on Monday. Initial support was seen at the 200-day moving average at 81.516.
The move came as the euro stalled ahead of chart resistance at $1.3300 for a third session. It last traded at $1.3264. Against the yen, the dollar was at 97.88, holding just above a one-month low of 97.61 hit on Monday.
The Barclays analysts recommended re-initiating short euro/dollar positions, believing the fundamental reasons for such a move were still in place, not least because there is limited scope for a more dovish Fed than current market expectations.
They also said recent data pointed to a more resilient U.S. private sector activity versus a subdued Europe, and this divergence in economic prospects should become more apparent in the second half of 2013.
The Fed, European Central Bank and Bank of England will hold their respective policy reviews this week.
While Fed officials are likely to debate on how best to prepare financial markets for a reduction of their bond-buying program, all three major central banks are expected to assure investors that any policy tightening is still a long way off.
Investors are also waiting for second quarter U.S. growth data due on Wednesday and the influential U.S. jobs report for July on Friday.
(Editing by Shri Navaratnam)