Dollar firm as Fed headlines big week for central banks

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By Dhara Ranasinghe

LONDON (Reuters) - The dollar held firm near two-decade highs against other major currencies on Monday, biding its time ahead of a slew of central bank meetings that include one by the U.S. Federal Reserve that is likely to deliver another hefty rate hike.

Trade was generally subdued, with markets in London and Tokyo closed for public holidays.

Still, world stock markets remained on edge and the dollar maintained its firm tone, given expectations that the Fed would maintain its aggressive rate-hike path to contain uncomfortably high inflation.

The dollar index, which measures the currency against six counterparts, was up 0.4% at 110.06, heading back towards a 20-year high of 110.79 hit on Sept. 7.

"A while back there was talk that the Fed was close to being done with rate hikes, but that was premature," said Nordea chief analyst Jan von Gerich. "The Fed is not close to being done and that is supportive for the dollar."

Since data last week showed a broadening in underlying U.S. consumer price rises, markets have entertained the possibility of a 100 bps rate hike when the Fed concludes its two-day meeting on Wednesday. Markets fully price in a 75 basis point Fed rate hike this week and a roughly 20% chance of a 100 bps increase.

This week is also smattered with holidays that could thin liquidity and result in sharper price moves, with Japan and Britain off on Monday, Australia on Thursday, and Japan again on Friday, among others.

The euro was 0.25% lower at $0.9993, sterling was 0.4% weaker at $1.1378 and within sight of Friday's 37-year lows, while the New Zealand and Australian dollars slipped more than 0.5% each.

Canada's dollar fell to its lowest in almost two years at 1.3324 per U.S. dollar.

The dollar was around 0.4% firmer at 143.46 yen, hovering beneath a strong resistance level at 145 that has been reinforced by Japanese policymakers' toughened talk of currency intervention.

The BoJ is widely expected to stick with massive stimulus at its meeting on Wednesday and Thursday, keeping its ultra-loose policy in place. But a turning point in Japanese monetary policy may come sooner than has been thought, with the central bank recently dropping the word "temporary" for its description of elevated inflation.

"We doubt that the yen weakness thus far will be considered concerning enough to force a change in the BoJ’s reluctance to kick off normalization any time soon," UniCredit analysts said in a note.

China's yuan ended at a fresh 26-month low on Monday and traded below the psychologically critical 7-per-dollar level. In offshore trade, the yuan was 0.35 weaker.

Bitcoin, the biggest cryptocurrency by market value, fell to a three-month low below $19,000, as unease over rising interest rates globally knocked risk assets.