FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, notes that the US dollar continues to remain on the defensive against the other major currencies ahead of this week’s FOMC meeting. Key Quotes “The dollar index has fallen back into the middle of its trading range which has remained in place throughout most of this year after failing to break decisively above the 100.00-level earlier this month. The paring back of monetary easing expectations for overseas central banks has taken the wind out of the sails of the US dollar rally. The pullback for the US dollar is also being reinforced and likely exaggerated by position adjustment in the near-term as broader financial market conditions have become less favourable for US dollar strength.” “Weakness in commodity prices, emerging market assets, US high yield investments, and the renminbi are all resulting in more risk-averse trading conditions encouraging a further lightening of long US dollar positions. The latest IMM report revealed that long speculative US dollar positions still remained elevated in the week ending the 8th December although they have likely since adjusted lower.” “Long US dollar positions are likely to be lightened further ahead of the upcoming FOMC meeting given the risk that the Fed may overcompensate for raising interest rates for the first time since June 2006 by providing more dovish than expected communication. However, a “dovish” rate hike from the Fed is well anticipated and US dollar weakness already in advance of the FOMC meeting should help to dampen the scope for any further weakness.” “If the Fed falls short of providing the dovish message that the market is expecting alongside the first rate hike it would help the US dollar to rebound.” “However, if the Fed meets expectations the US dollar may remain offered into year-end as long US dollar positions maybe lightened further. It would fit as well with the historical seasonal performance of the US dollar which has on average tended to underperform at the end of calendar years. The US dollar has then tended to recover any lost ground early in the new year.” “Overall we do not believe that the relative fundamentals have moved much against the US dollar so far this month although there is a risk that Us dollar weakness could temporarily overshoot into year end.” For more information, read our latest forex news.