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The dollar won a reprieve on Monday after last week's steep slide but traders said it could head for a test of its all-time low against a basket of currencies if the U.S. Federal Reserve takes a cautious stance towards tightening later in the week.
In thin trade due to Easter holidays in Australia and much of Europe, Japanese importer bids for dollars were enough to boost the U.S. currency against the yen and help it to erase earlier losses against other currencies.
With dollar interest rates seen taking a pivotal role in the market, players are looking to a news conference by Chairman Ben Bernanke on Wednesday after the central bank's two-day policy meeting.
The dollar index rose slightly to 74.07, but many trader says it could test a three-year low of 73.735 hit last week. A break of that could open the way for a test of the record low of 70.698 hit in 2008.
The dollar has been falling due to perceptions that the United States is set to maintain an easy monetary policy even as most other major global economies look to tighter monetary policy to rein in inflation.
The Fed is widely expected to stick to completing its $600 billion asset purchase programme in June but many market players think a backdrop of softer-than-expected economic data, weak housing markets and possible government austerity measures to tackle the budget deficit all make it more likely the Fed will keep its support for the recovery in place for some time.
Many analysts believe the U.S. central bank will hold the size of its balance sheet steady by reinvesting maturing assets after June to avoid a passive tightening -- an issue that will likely be discussed at the April 26-27 meeting.
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