* Canadian dollar, Norwegian crown both sharply lower
* Oil falls 3 percent after Friday recovery
* Euro and yen both up against the dollar
* Worries Fed could signal concern about economic outlook
By Patrick Graham
LONDON, Jan 25 (Reuters) - The dollar edged down against a
basket of currencies on Monday as renewed selling on oil markets
drove investors into their current safe havens of choice, the
euro and yen, while weakening the currencies of major crude
exporters.
After a reasonably upbeat session in Asia, stock markets
quickly turned negative in Europe and oil was down almost 3
percent, driving roughly half percent falls in the Canadian
dollar and Norwegian crown. CAD=D4 EURNOK=D4
The drop in crude turned the focus back onto the broadly
negative view of the outlook for the world economy that has
dominated financial markets since the start of 2016.
That has tended to benefit the euro, yen and Swiss franc at
the expense of the dollar.
"We cannot sound the all clear, there is clearly a lot of
uncertainty out there," said Commerzbank (DE:CBKG) strategist Thu Lan
Nguyen.
"The main theme this morning is of commodity currencies
being under pressure. A lot depends on the oil price. If we see
a sharp drop back to the levels we saw last week, we can see
another round of the market nerves we have been seeing."
The dollar fell around a third of a percent against its
Japanese counterpart to 118.36 JPY= , well off last week's
one-year low of 115.97 yen. The euro was also up about 0.4
percent at $1.0828 EUR=EBS .
The U.S. Federal Reserve is widely expected to leave its
federal funds rate unchanged at 0.25-0.50 percent at the
conclusion of its policy meeting on Wednesday.
Traders, however, will be more focused on whether the
possibility of cooling inflation and recent global market
turmoil could prompt the Fed to signal concern about the U.S.
and world economic outlooks that may raise questions about its
pace of interest rate tightening.
The recently risk-averse mood and volatile markets have led
investors to pare bets on any more Fed interest rate hikes on
the near horizon, and reduce their dollar positions.
Speculators reduced bullish bets on the dollar for a fourth
straight week through Jan. 19, as net longs fell to their lowest
level since late October, according to Reuters calculations and
the latest data from the Commodity Futures Trading Commission,
released on Friday.
"Markets are concerned about both continued tightening and a
U.S. recession. They likely only need to worry about one,"
Andrew Sheets, chief cross-asset strategist at Morgan Stanley (N:MS)
wrote in a note to clients.
"Were the Fed to remind the market that it remains
data-dependent, it could temporarily alleviate some of the
pressure on USD," Sheets said.
The Bank of Japan will conclude a two-day policy meeting on
Friday, at which sources familiar with its thinking say it is
likely to cut its core consumer inflation forecast for the
coming fiscal year to possibly below 1 percent.
While the BOJ is expected to hold policy steady this week,
downbeat economic reports have increased market speculation of
more easing by April. There was little sign of any conviction on
that in yen price action on Monday, dealers said.