Dollar gains as oil recovers, but Fed uncertainty limits upside

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The dollar edged higher on Monday, helped by a recovery in oil, although nervousness about what the Federal Reserve will say in its post-meeting statement after a widely expected rate hike limited the greenback's upside.

The rebound in U.S. crude oil in the afternoon improved risk appetite a bit, spurring some selling in traditional safe havens like the Swiss franc and helping the dollar cut its losses against the yen, another safe haven.

"Oil is certainly a factor, up nearly 2 percent, but I just think the market is really restless and fidgety ahead of the Fed," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

"It feels like a rate hike is a done deal, but there seems to be a lot of uncertainty about what the Fed might say about the road ahead for monetary policy. So that's limiting the dollar's upside and downside," he added.

The dollar index has been down 2.6 percent so far this month, much of it due to profit-taking as investors have fully priced in the first U.S. interest rate increase in more than nine years.

The Fed is expected to deliver that policy move on Wednesday.

U.S. crude oil rose 2 percent after earlier dropping to a near 11-year low. Analysts and traders, however, said despite the rebound, oil has yet to reach its bottom.

Analysts had fretted earlier that the continued decline in oil prices due to a prolonged supply glut and more recent turbulence in the U.S. high-yield market, with the closure of three credit funds, have raised the possibility that the Fed would be even more cautious.

In late trading, the dollar was up 0.1 percent against a basket of currencies at 97.685 . Against the yen, the dollar was flat at 121.02 yen .

The greenback had earlier dropped to a seven-week low versus the Swiss franc, but recovered in the afternoon session to trade 0.3 percent higher on the day at 0.9860 franc .

The euro, on the other hand, was little changed at $1.0991 .

The euro earlier benefited from reduced appetite for risk. Investors who had held carry positions, in which they borrow euros in order to sell them and buy a higher-yielding currency, bought them back.

Against the Canadian dollar, the greenback was little changed at C$1.3732 after earlier hitting C$1.3677 , its lowest since June 2004.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Lisa Von Ahn and Dan Grebler)