By Saikat Chatterjee
LONDON (Reuters) - The dollar held near a 10-month low against an index of other currencies on Wednesday as the chances of U.S. rate increase seemed to dwindle but investors remained wary of pushing it lower before major central bank meetings.
Both the European Central Bank and the Bank of Japan meet this week, and market watchers will be looking to see if the recent strength of the euro and the yen influence their policy outlooks.
"We believe that it is appropriate to drop the easing bias as when it when it comes to quantitative easing," said Manuel Oliveri, FX strategist at Credit Agricole.
"This makes sense after indicating that the lower bound in rates was reached and is also a natural next step towards an announcement of actual tapering in September this year."
The euro was 0.3 percent lower at $1.1524 <EUR=EBS>, after rising as high as $1.1583 on Tuesday, its highest since May 2016.
The ECB meets on Thursday, and it is expected to adjust its language as it gets closer to normalizing policy. That may include dropping a reference to its readiness to extend or expand its bond-buying program.
In the United States, the dollar has come under pressure after Republicans failed to pass a healthcare bill, raising doubts about President Donald Trump's agenda. Markets put the probability of a rate increase over the next year at less than a fifty percent, according to CME's Fedwatch monitor.
Against a basket of other major currencies, the dollar was up 0.2 percent at 94.784. That is still around 7 percent lower on the year and within sight of Tuesday's low of 94.476. <.DXY>
Morgan Stanley strategists noted that positioning in the U.S. dollar is the most bearish since April 2009, suggesting it may be ripe for a reversal.
But recent purchases of dollars by Asian central banks, to keep their currencies from appreciating too much, may also work in the euro's favor. If they recycle their interventions into other major currencies, any dips in the euro <EUR=> would be shallow and temporary.
In other currencies, the Canadian dollar <CAD=> was holding near its highest level since May 2016 tested on Tuesday.
(Reporting by Saikat Chatterjee, editing by Larry King)