(New throughout after start of European trade)
* Fed expected to hike at two-day meeting beginning Tuesday
* Market worried Fed may hint at concern over dollar gains
* Oil price rally lifts Canadian dollar, Norwegian crown
* Long dollar positions continue to rise - IMM data
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, Dec 12 The dollar dipped against the
euro and a basket of currencies on Monday, an oil-driven rise in
inflation expectations not enough to push on its broader rally
as traders worried about the outcome of Wednesday's Federal
Reserve policy meeting.
The U.S. central bank is widely expected to raise interest
rates this week and market concerns have turned to what signal
it will send on further policy tightening and the dollar's 7
percent gain against a basket of major currencies since early
The euro gained almost half a percent in morning trade to
push back above $1.06, pushing the dollar index a
third of a percent lower - an indication the market is not
convinced the Fed will promise much in rate rises for next year.
"They (the Fed) really don't want to scare the market," said
Alexandre Dolci, a strategist at Spanish bank BBVA in London.
"I think they will remain quite cautious in their forecasts
for next year. They may not be as hawkish as the market
Another factor in the fall in the dollar index was a robust
gain for the Canadian dollar on the back of the weekend deal by
OPEC and non-OPEC producers to curtail output.
That drove crude prices up by around 5 percent to their
highest levels in a year and a half. The other major developed
world oil-dominated currency, the Norwegian crown, gained 0.7
percent against the greenback.
Expectations that would drive global inflation higher have
generally supported the dollar above other major currencies in
the past month and it was broadly stronger against the yen,
topping 116 yen for the first time since early February.
But traders said signs Italy was ready to bail out its
troubled third-largest bank, Monte dei Paschi, was also feeding
into a recovery for the euro after hefty losses following last
week's European Central Bank meeting.
While the ECB did announce a reduction in the amount of new
money-printing it will do from April next year, by extending the
programme for longer than expected and tweaking other rules, it
knocked more than 2 cents off the currency on Thursday.
That brings the dollar close to highs from last year at
which Washington began to express concern.
"It's going to be hard to have the energy to make new lows
(on the euro) before the Fed," said Richard Benson, co-head of
portfolio investment at currency fund Millennium Global in
"An explicit mention of the currency in either the statement
or the news conference and it might become more difficult for
(Editing by Catherine Evans)