NEW YORK (Reuters) - The dollar index dropped to its lowest in nearly four months on Wednesday, weighed by uncertainty on when the Federal Reserve will pare back its ultra-loose monetary policy.
The index, which tracks the greenback against a basket of six other major currencies, fell as low as 80.748 <.DXY>, its lowest since February 20, and was last down 0.4 percent at 80.794.
"There is a lot of consolidation going on headed into next week's Fed meeting,' said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.
"There is broad volatility and people are afraid the Fed will push off its bond-buying tapering until later in the year," he said.
The dollar traded at 95.34 yen, down 0.7 percent on the day. The euro traded at $1.3350, up 0.3 percent on the day, according to Reuters data.
"There was no real catalyst in this latest leg lower in dollar/yen," a trader said. "The move is largely driven by stops in a low-liquidity environment."
Deleveraging, monetary policy and positioning have been driving markets and "today, markets are retracing some of the losses suffered in the last few sessions," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"Increasingly, monetary policy appears to have reached its limit in terms of stimulus," she said, noting that the Fed appears to be moving towards stepping out of quantitative easing while the Bank of Japan has an aggressive policy in place, but is not eager to add to it.
"Accordingly there appears to have been a rapid shift to de-lever, which has weighed heavily on emerging market currencies and the carry trade," Sutton said.
Doubts about the BoJ's commitment to easy monetary policy aimed at boosting growth had caused Japanese stocks <.N225> to fall and the dollar to drop 3 percent against the yen on Tuesday as investors unwound hefty bets against the Japanese currency.
Since the start of the year, speculators and long-term investors have been building favorable dollar positions on the back of good first-quarter U.S. economic data, but some are now trimming those bets and booking profits.
"Q2 U.S. economic data is softer and this appears to be limiting investors' desire to lengthen dollar positions despite the greenback's safe-haven status," Jane Foley, senior strategist at Rabobank, wrote in a note.
Given that confidence in the euro zone was better than a year ago, investors were hesitant to build large bets against the area's common currency.
The euro remains vulnerable to losses should the region's economy remain in a prolonged recession and if borrowing costs for some of the most indebted euro zone countries rise. European Central Bank Executive Board member Peter Praet on Tuesday said the ECB had room to cut interest rates further.
(Additional reporting by Anirban Nag in London; Editing by James Dalgleish)
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