The greenback ended its 3-day rally versus the euro and retreated against other European currencies on Monday as traders booked profit on recent long dollar positions ahead of FOMC policy meeting and key U.S. non-farm payrolls data later this week. Dealers expect the buck to remain sidelined for the time being as markets await the rate decision on Wednesday by Federal Open Market Committee together with the first-quarter U.S. growth numbers.

The FOMC is widely expected to cut the benchmark overnight lending rate by 25 basis points from current 2.25 percent to 2.0 percent after the 2-day meeting (a market survey showed only 8 out of 71 analysts expect a 50 bps cut with 2 expecting to Fed to keep rates on hold). The committee may also give signal to the market in its accompanying statement that Fed's interest rate-cutting campaign is coming to an end and indicate present high inflation pressure.

Comments from European Central Bank officials, Jean-Claude Trichet and Yves Mersch who said risks to price stability remained on the upside, lifted the single currency in European session. However, euro then retreated from intra-day high of 1.5894 as EU's Alumnia said that euro's exchange rate is now overvalued and would slow export growth in the eurozone. Swiss franc also rebounded from 1.0299 in New York morning.

On the data front, a surprise rise in May German Gfk consumer sentiment also supported the euro. However, the release of much lower-than-expected German CPI data, -0.2% m/m and 2.4% y/y (vs forecast of 0.2% m/m and 2.8% y/y respectively) had little impact on FX markets.

The British pound surged versus dollar mainly on M & A related demand in sterling, cable jumped from 1.9782 to 1.9965 before easing in New York trading on selling by hedge funds.

Against the Japanese yen, the dollar rose to a 2-month high of 104.83 before retreating on profit-taking and cross-buying in yen due to unwinding in yen carry trades as more and more people expect the Fed to stop cutting interest rates. The pair then traded lower in New York and fell to an intra-day low of 104.08.

Late comments from Warren Buffett, the world's richest person, put some pressure on the greenback as he said the U.S. economy is in a recession that will be longer and deeper than most people think.

On Tuesday, economic data to be released include New Zealand trade balance, U.K. CBI distribution trade number and U.S. consumer confidence at 14:00GMT. Japanese market will be closed due to Showa Emperor's Birthday holiday.