* Dollar under pressure ahead of Federal Reserve
* European shares boosted by M&A activity
* Nikkei plumbs four-week lows, other Asian markets also softer
* Data, Fed, ECB, Bank of England meetings pose hurdles this week
NEW YORK, July 29 (Reuters) - U.S. stocks fell but the dollar came off a five-week low on Monday ahead of a two-day Federal Reserve meeting where the U.S. central bank is expected to reaffirm its commitment to keep benchmark interest rates low.
Weaker U.S stocks reflected a fall in contracts to purchase previously owned U.S. homes in June, which retreated from a more than six-year high the prior month and suggested rising mortgage rates were starting to dampen home sales.
Until recently, investors have embraced average or weak data with the expectation that the Fed will continue to stimulate the economy, putting a floor under stock prices. However, the prospect of a slightly less-accommodative Fed in the near future has increased the market’s need for a stronger economy.
In addition to the Federal Reserve, the European Central Bank and the Bank of England also meet this week. The ECB and the BOE are expected to repeat or refine their “forward guidance” that borrowing costs will remain extraordinarily low as long as growth is sub-par and inflation poses no threat.
“The focus right now is the Fed meeting and then the employment numbers at the end of the week,” said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.
The Dow Jones industrial average was down 58.98 points, or 0.38 percent, at 15,499.85. The Standard & Poor’s 500 Index was down 7.28 points, or 0.43 percent, at 1,684.37. The Nasdaq Composite Index was down 12.35 points, or 0.34 percent, at 3,600.81.
With just three trading days left in the month, the S&P 500 is set to post its best monthly performance since October 2011. The Nasdaq’s advance makes July so far the best month in a year and a half.
Jankovskis said investors will try to decipher what the Fed knows about the U.S. jobs report a couple of days in advance, which could make Wednesday “even more volatile than it usually is” on Fed statement days.
On Friday, the U.S. payrolls report will be released, with forecasts for 185,000 jobs added in July and a dip in the jobless rate to 7.5 percent. A strong report would support the case for the Fed to start rolling back its stimulus in September and help the dollar.
European share markets remained buoyant as two more giant merger deals, this time in the media and pharmaceuticals sectors, added to a flurry of M&A activity in recent weeks.
The FTSEurofirst 300 index of top European shares was up 0.1 percent. The benchmark index has risen 9 percent since late June.
The MSCI index of world stock markets fell 0.5 percent.
The dollar was 0.3 percent lower against the yen at 97.9806 yen while the dollar index was last up 0.1 percent after earlier touching a five-week low of 81.785.
“The dollar faces a lot of key event risk in the week ahead with the release of the U.S. Q2 GDP report and the latest FOMC policy meeting on Wednesday, followed by the release of the U.S. employment report for July on Friday,” said Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi.
In debt markets, German Bund futures edged back into negative territory in thin trade and euro zone periphery bonds eased. But investors refrained from placing big bets before this week’s monetary policy decisions and data.
Benchmark 10-year Treasury notes fell 5/32 in price, their yields edging up to 2.58 percent from 2.57 percent late on Friday. Ten-year yields have ranged from around 2.43 percent to 2.63 percent in the last two weeks, after hitting two-year highs of 2.76 percent on July 8.
Commodities markets also struggled, although concerns about supply disruptions kept oil off three-week lows. Nervousness ahead of Chinese manufacturing data on Thursday hit copper earlier in the day.
With investors bracing for another round of disappointing economic news from the world’s No. 2 economy, Asian markets were generally weaker.
Japan’s Nikkei dropped 3.3 percent to hit a four-week low. Investors’ jitters were compounded by a stronger yen, which is negative for the country’s exporters, and concerns that plans to increase the country’s sales tax - its most significant fiscal reform in years - could be watered down.
“A sense of caution is looming in the market, especially because investors are worried about a slowdown in the Chinese economy. And when they see a risk in Asia, they tend to buy the yen, and the Japanese market is hit by that,” said Kyoya Okazawa, head of global equities at BNP Paribas.