Dollar rebounds against euro, yen as focus turns to Fed

NEW YORK (Reuters) - The U.S. dollar rebounded against the euro and yen on Tuesday after traders took profits from gains in those currencies and favored the greenback on expectations that the Federal Reserve could take a hawkish bias in a policy statement on Wednesday.

Traders said anticipation that the central bank could reinforce expectations for a September rate hike helped boost the dollar after the biggest dive in Chinese equity markets in eight years weighed on the greenback in the previous session.

On Monday, the euro hit a two-week high against the dollar of $1.11295 and the dollar hit a nearly two-week trough of 123.010 yen.

"I don’t think you want to be short dollars going into the FOMC," said Win Thin, currency strategist at Brown Brothers Harriman in New York, referring to the meeting of central bankers on the Federal Open Market Committee.

Fed rate hikes are expected to boost the dollar by driving investment flows into the United States.

Shanghai shares <.ssec> closed 1.7 percent lower on Tuesday after plunging 8.5 percent on Monday. The slide had led some traders to buy the safe-haven yen and close short bets against the euro, which in turn had sent that currency higher.

Tuesday's less dramatic move in Chinese shares allowed the dollar to regain some ground. The dollar hit its highest level against the Swiss franc in over three months of 0.96740 franc early in the session.

Still, analysts said uncertainty as to whether the Chinese stock market's weakness would affect the Fed's timeline for hiking rates kept a lid on the dollar's gains.

"There is a possibility that China weakens more than we expected...and that tilts the Fed into delaying hikes," said Jose Wynne, global head of FX research at Barclays in New York. He said, however, that he still expected the Fed to hike in September.

Data showing U.S. consumer confidence weakened in July to its lowest level since September 2014 also weighed on the greenback.

The euro was last down 0.41 percent against the dollar at $1.10430 . The dollar was up 0.31 percent against the yen at 123.620 yen . The dollar was last up 0.11 percent against the franc at 0.96350 franc .

The dollar index, which measures the greenback against a basket of six major currencies, was last up 0.25 percent at 96.745 <.dxy>. That marked a rebound from a nearly two-week low of 96.288 touched on Monday.

(Reporting by Sam Forgione; Editing by Meredith Mazzilli and David Gregorio)