FOREX-Euro drops vs dlr on caution over Fed, ECB meetings
* Euro retreats from 3-wk high vs dollar in cautious climate
* Poll shows ECB likely to restart bond buying program
* Policy decisions due this week in euro zone, U.S., UK
* Fed not expected to unveil new measures this week
By Julie Haviv
NEW YORK, July 30 (Reuters) - The euro dropped against the dollar for the first time in four days on Monday as investors refrained from taking on risk ahead of key European Central Bank and U.S. Federal Reserve policy meetings.
Fears that the ECB may not take strong enough action to contain the region's debt crisis and belief the Fed will not announce new stimulus measures this week had the euro retreating from Friday's three-week high against the greenback.
Market expectations for action from the euro zone's central bank, which holds its policy meeting on Thursday, have grown sharply after ECB President Mario Draghi said last week the bank would do whatever it takes to save the euro, a message echoed by German Chancellor Angela Merkel and French President Francois Hollande.
"Last week's euro rally was pretty aggressive, so it makes sense that we are seeing some consolidation today," said John Doyle, director of markets at Tempus Consulting in Washington, D.C. "Overall, there is really no good reason to be buying the euro, especially with Spain and Italy remaining big issues."
Against the dollar, the euro fell 0.5 percent to $1.2258. That is down from Friday's three-week high of $1.2389, but above last Tuesday's two-year low of $1.2040, according to Reuters data.
Adding to bearish sentiment was the euro's failure on Friday to close above a key technical level near $1.2325.
Tempus' Doyle said he expects the euro to stay within the range of $1.21 to $1.2350 for another week or two, with medium-term support at $1.2050.
"The euro will get a bump on ECB action, but sellers should emerge at the $1.25 level," he said.
The ECB will probably say that it will re-start its dormant government bond buying programme with the aim of lowering Spanish and Italian government bond yields, a Reuters poll of money market traders showed.
Many, however, remain sceptical of ECB bond buying because Germany has repeated its opposition to such a step.
"Traders were in 'Show me' mode, with enthusiasm fading over last week's comments by both Mario Draghi and Angela Merkel in support of the euro," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
German Economy Minister Philipp Roesler warned the ECB about any large-scale government bond purchases and a German government spokesman on Monday reiterated Berlin's opposition to any form of mutualization of euro zone debt.
Markets were bracing for a busy week, with central bank decisions due in the United States and the UK as well as the euro zone, in addition to key U.S. jobs data on Friday.
The U.S. Fed begins a policy meeting on Tuesday and its decision will be announced on Wednesday. Economists expect policymakers to sit on their hands for now.
"We look for the Fed to extend its forward guidance language to 'at least late 2015' at this week's meeting," Michael Hanson, senior U.S. economist at BofA Merrill Lynch in New York, said in a global research report.
"While there is a moderate chance of additional QE at this meeting, we think it is more likely that the Fed will announce a third round of asset purchases in September," he said. "We look for $600 billion of purchases, split roughly equally between Treasury and MBS securities, through June 2013."
A third round of bond buying, called quantitative easing, would be negative for the dollar as it is tantamount to printing money and therefore dilutes its value.
In related news, foreign exchange turnover rose slightly in North America but slipped elsewhere in the world in early 2012 when compared with the year earlier period, according to a semiannual survey of major central banks on Monday.
Against the Japanese yen, the dollar eased 0.3 percent to 78.18 yen, according to Reuters data.
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