The dollar eased against the yen but clung to narrow ranges against European currencies on Monday as dealers waited for interest rate clues from a policy meeting of the U.S. central bank and key economic data later this week. Trading was quiet with Japan closed for the first day of a three-day holiday and Britain closed for the May Day bank holiday. Signs of a recovering U.S. jobs market and rising price pressures have raised expectations of higher U.S. interest rates in the coming months. Tuesday's statement from the Federal Reserve and Friday's monthly U.S. employment report will be scoured for clues on when the first rate hike will come. "The market is very quiet and everyone is waiting for this week's two big events: the Federal Reserve meeting and the labour report," said Stephen Jen, chief currency economist at Morgan Stanley.
"Recent data have increased the likelihood of an August rate hike but I think the Fed will be keen to sound patient on interest rates even if it drops mention of the word 'patience' itself." The dollar was little changed against the euro at $1.1965 in early European trade but a third of a percent weaker against the yen, at 109.98 yen . The euro showed little reaction to data showing euro zone manufacturing expanded at its fastest pace in over three years in April as a weaker currency and brightening global outlook boosted demand.
BUSY WEEK AHEAD
The Federal Reserve is not the only central bank meeting this week. The Reserve Bank of Australia also meets on Tuesday, while the Bank of England is widely expected to raise interest rates after its meeting on Thursday. A combination of central bank meetings and some key data releases could make for volatile trade later in the week. Friday's U.S. payrolls report is expected to be a big market-mover. "The biggest and easiest expectation this week is more volatility," said Robert Rennie, chief markets strategist at Westpac Bank, Sydney. "It is a holiday week as well. The market will try and keep positioning to a minimum and avoid particularly large bets." While higher interest rates are seen as supportive of the dollar, economists say a tightening scenario may be less beneficial for the U.S. currency if it is the result of higher inflation rather than higher growth. The dollar fell sharply last Thursday after a U.S. gross domestic product for the first quarter showed below-forecast growth but a surprising rise in inflation. The U.S. Institute of Supply Management releases its April manufacturing activity index at 1400 GMT. Analysts polled by expect the index to creep up to 63.00 in April from 62.50 in March. U.S. construction spending figures are due for release at the same time and are expected to show spending on new construction rose in March after dipping in February.///www.reuetrs.com