Dollar falters as markets expect cautious outlook from Fed

NEW YORK (Reuters) - The dollar on Monday dropped from an 18-month high reached the previous session, ahead of the Federal Reserve's policy meeting this week that will likely result in a U.S. interest rate hike but a more cautious tone on the economy next year.

The Fed ends its two-day policy meeting on Wednesday and is expected to tighten for a fourth time in 2018. All eyes, however, will be on signals about the pace of further tightening and the Fed's sense of how the economy is holding up amid a U.S.-China trade conflict and global financial market volatility.

"Investors are expecting to see a dovish rate hike from the Fed - a rate rise, accompanied by a statement that provides an outlook for slower rate increases for the foreseeable future, compared to the central bank's assessment in September," said Fawad Razaqzada, market analyst, at Forex.com in London.

Signs of a global slowdown led by Europe and China, trade war concerns, and tame U.S. inflation have pared rate hike expectations for 2019.

Last week, the dollar enjoyed its best weekly performance since September, reaching an 18-month high on Friday. The euro slipped last week after the European Central Bank cut inflation and growth forecasts and struck a cautious tone about the outlook for the world economy.

In afternoon trading on Monday, the dollar index, which measures the greenback's value against a basket of other major currencies, slipped 0.4 percent to 97.065 <.DXY>.

A bearishness in the dollar has started to emerge in speculative market positioning, in which short-term investors cut net long bets on the dollar from a near two-year high, according to Commodity Futures Trading Commission data.

The euro, meanwhile, rose 0.4 percent on Monday, rising as high as $1.1358 even though EU statistics office Eurostat earlier lowered November's inflation reading. The euro fell as low as $1.1266 last week.

Weaker-than-expected economic data from China and Europe last week sent investors toward the perceived safety of the dollar.

The offshore Chinese yuan, which has fallen significantly in 2018, was little changed at 6.8971.

Investors are looking to a major speech by President Xi Jinping on Tuesday to mark the 40th anniversary of China's market reforms. China is also scheduled to hold its annual Central Economic Work Conference this week.

The dollar fell to a one-week low against the yen, and was last down 0.6 percent at 112.94.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Steve Orlofsky and Rosalba O'Brien)

By Gertrude Chavez-Dreyfuss