By Karen Brettell
NEW YORK (Reuters) - The U.S. dollar retreated from seven-month highs on Monday as investors evaluated whether the Federal Reserve will let inflation run above target before raising interest rates, and as investors took some profits from the recent dollar rally.
Fed Chair Janet Yellen said on Friday that the U.S. central bank may need to run a "high-pressure economy" to reverse damage from the 2008-2009 crisis.
"The question is if the Fed is going to let inflation run hot and then have to tighten very aggressively at the back end of the cycle, which would have potentially negative economic implications," said Mark McCormick, North American head of FX strategy at TD Securities in Toronto.
Investors also took some profits from the rally that has seen the dollar index <.DXY> gain 3.5 percent in the last two months.
It was last down 0.16 percent at 97.862, after rising to 98.169 in overnight trading, the highest since March 10.
"The market is starting to take a little bit of profits on the long U.S. dollar trade that has been doing pretty well over the last couple of weeks," McCormick said.
The dollar added slightly to losses after Fed Vice Chair Stanley Fischer on Monday acknowledged that "having very low interest rates makes monetary policy more difficult," while adding it is "not that simple" for the Fed to coax interest rates higher.
"Fischer was much more problematic about the possibility of the Fed controlling the yield curve," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
"I think he was trying to make a point that they are going to try to stay true to more conventional monetary policy," Schlossberg said.
The European Central Bank is also trying to move away from unconventional easing including its bond purchase programs as its economy improves.
The ECB is expected to keep policy unchanged when it meets on Thursday, according to traders polled by Reuters.
"They have modest but expansionary growth and I think (President Mario Draghi's) more or less content with where they stand," said Schlossberg.
The ECB is expected to extend asset purchases beyond March 2017, before tapering some time next year.
The euro <EUR=> gained 0.28 percent to $1.10.
(Editing by Meredith Mazzilli and Lisa Shumaker)