FOREX-Dollar drops in thin trade, but Fed taper offers support
* Major currencies in holding pattern
* Christmas holiday keeps markets subdued
* Dollar off multi-year highs vs yen
By Anirban Nag
LONDON, Dec 23 (Reuters) - The dollar fell on Monday as some positioned for a soft U.S. inflation reading, though with the Federal Reserve starting to withdraw some of its huge monetary stimulus, the currency's losses were limited.
Major currencies were in a holding pattern amid thin liquidity due to a holiday in Japan, while for most of Europe it was the last full trading session before a Christmas break. That left many investors and speculators to square positions and trim long dollar positions before the year-end.
The dollar fell 0.3 percent to 103.77 yen, easing back from a five-year peak of 104.64 hit on Friday. Volumes in the pair were 70 percent below their one-month average, according to Reuters Matching data.
The euro was slightly higher at $1.3695, having climbed off a two-week trough of $1.3625 on Friday. Against the yen, the common currency stalled at 142.15, off a five-year high of 142.90.
"While the potential for speculative dollar/yen profit taking remains substantial given yet another new high, the underlying trend of yen weakness should persist into the new year," said Adam Myers, European head of FX strategy at Credit Agricole.
"Our expectations for dollar buying in early 2014, complementing yen selling pressure should resume and see dollar/yen move higher towards our 106 yen end-March forecast."
Data on Friday supported the Fed's decision to start withdrawing stimulus, with revised figures showing the world's biggest economy grew at its fastest pace in almost two years in the third quarter.
U.S. data due for release this week include personal income and spending on Monday and durable goods on Tuesday.
The core personal consumption and expenditure (PCE) rate is expected to show rather muted price pressures in the United States, a factor that could weigh on the dollar, analysts said.
"Further downward inflation surprises in the year ahead may delay QE tapering, weighing upon the dollar," Lee Hardman, currency analyst at Bank of Tokyo Mitsubishi, said in a note.
But any drop in the dollar is likely to be temporary.
Part of the reason why the dollar will be sought-after is because short-dated Treasury yields are still moving higher, driven by expectations that the Federal Reserve would continue to trim its bond-buying programme in coming months.
The 10-year Treasury yields also rose and if forthcoming activity out of the United States continued to outperform, rate differentials are likely to move in favour of the dollar, analysts said.
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