By Jemima Kelly
LONDON (Reuters) - The dollar recovered a little ground on Wednesday after recording its worst start to the year in three decades on concerns the United States was poised to ditch its two-decade-old "strong dollar" policy.
The greenback skidded 2.6 percent against a basket of major peers (DXY) in January, its worst showing since 1987. It fell first on worries over signs of protectionism from U.S. President Donald Trump and then on mounting unease that the new administration is set on talking down the currency.
A senior trade adviser to the president, Peter Navarro, said on Tuesday that the euro was "grossly undervalued", sending the single currency soaring above $1.08 for the first time since early December
Navarro's comments were followed by Trump himself, who complained that "every other country lives on devaluation" while the United States "sit(s) there like a bunch of dummies".
"The market is concerned about what it is he’s prepared to do to take care of these concerns about the dollar – that’s the issue that’s going to hang over the market," said Bank of New York Mellon (NYSE:BK) currency strategist Neil Mellor.
"In some ways I think we’re heading for a mini re-run of last year, albeit for different reasons: everyone was geared up for dollar strength and then in the first quarter saw the dollar down."
Commerzbank (DE:CBKG) currency strategist Esther Reichelt, in Frankfurt, said currency markets would be relatively calm on Wednesday ahead of the conclusion of the U.S. Federal Reserve's latest policy meeting, though with Trump grabbing much of the headlines, the meeting has been relegated to the sidelines.
The Fed is expected to keep interest rates unchanged in its first policy decision since Trump took office, as the central bank - along with the market - awaits greater clarity on his economic policies.
The lack of clarity over Trump's promised fiscal stimulus has been another factor that has weakened the dollar since the start of the year.
It had hit 14-year highs on the view that his policies would boost growth and inflation, leading to a faster pace of interest rate hikes, but it has fallen over 4 percent since then and is now trading less than 2 percent above its pre-election levels.
The dollar index traded less than 0.2 percent above the previous day's seven-week low on Wednesday, while the euro traded flat on the day just below $1.08.
Against the yen, though, the dollar was 0.4 percent higher at 113.25 yen <JPY=>.
Despite Tuesday's comments, which increased the prospect of Washington reversing the "strong dollar" policy advocated by presidents dating back to the Clinton administration, the U.S. currency still attracted demand.
"Trump is providing an opportunity for bargain hunters. The dollar ends up being sold on his statements, but ultimately it finds downside support as Treasury yields do not fall that much," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
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