Dollar reverses gains as Fed meeting starts, euro, yen strengthen

NEW YORK (Reuters) - The dollar fell on Tuesday, reversing its gains from the day before, ahead of a Federal Reserve monetary policy decision on Wednesday, while the euro and the Japanese yen strengthened against the greenback.

After six straight weekly declines, the dollar index was on track to fall about 3.2 percent for the month, which would be its biggest monthly fall since March 2016.

Traders are cautious ahead of a slate of events this week, including the U.S. Federal Reserve's two-day monetary policy meeting and a U.S. jobs report on Friday that will include data on nonfarm payrolls and average hourly earnings. The Fed began its meeting on Tuesday.

"We're just kind of jobbing around in wait of the Fed tomorrow," said Greg Anderson, a global head of FX strategy at BMO Capital Markets in New York.

Analysts expect the Fed to hold interest rates steady at the end of the meeting on Wednesday, but strike a hawkish tone in its statement, which would typically be positive for the dollar.

A spike in global bond yields, with 10-year U.S. bond yields pushing well above 2.70 percent, their highest since April 2014, prompted some investors to cut some short positions and pushed the dollar higher on Monday.

While yields fell overnight, benchmark U.S. 10-year yields, which move inversely to prices, touched their highest in nearly four years later on Tuesday, and 30-year yields climbed to their highest since May 2017.

"The dollar has been tracking treasury yields to some extent," said David Gilmore, a partner at Foreign Exchange Analytics in Connecticut.

"That certainly hasn’t been a consistent correlation in the last several weeks, but I think that's what's happening today."

The dollar pared losses throughout the day and was last down 0.10 percent against a basket of six major currencies <.dxy> at 89.219 at 3:34 p.m. ET (2034 GMT). The index pulled up from a low of around 88.43 set last week, its weakest level since December 2014.

The euro gained 0.11 percent to $1.2395, still a way from a three-year high of $1.2536 touched last week.

Sterling, which is highly correlated to risk-on sentiment, briefly fell below the $1.40 line for the first time in a week before climbing back above the level and last trading at $1.414.

The Japanese yen strengthened 0.11 percent versus the greenback at 108.86 per dollar.

On Tuesday night, U.S. President Donald Trump will give his State of the Union address. Trump said on Monday he will address his proposed immigration overhaul in his speech as well as his efforts to lower trade barriers around the world for American exports.

BMO's Anderson said he did not expect the speech to be market moving.

Treasury Secretary Steven Mnuchin gave U.S. currency bears a major boost last week with a tacit endorsement of a weak dollar. Trump later tried to row back from those comments, saying he ultimately wants the dollar to be strong.

Bitcoin slipped on Tuesday to a new one-week low on Bitstamp Exchange, and was last down 10.19 percent at $10,025.64.

(Reporting by Stephanie Kelly; Additional reporting by Saikat Chatterjee and Tommy Wilkes in London; Editing by Susan Thomas)