Dollar Pares Gains After Dovish Yellen Comments and Other Top Forex News.

The U.S. dollar pared gains against the yen on Monday after Federal Reserve Chair Janet Yellen struck a dovish tone on the economic outlook, while disappointing U.S. manufacturing data also weighed on the market.

Yellen’s comments came at the Development conference in Chicago, where she said that “considerable slack” still remained in the labor market and reiterated that the Fed’s commitment to economic stimulus will still be needed for some time.

While today’s data showed that manufacturing activity in the Chicago region expanded at a slower rate than forecast in March, as new orders fell.

The Chicago purchasing managers’ index fell 55.9 from 59.8 in February. Analysts had expected the index to tick down to 59.0.

During the U.S. session the dollar backed off more than a two-week high against the yen, with USD/JPY closing up 0.35% at 1.0320, down from a high of 1.0344 earlier.

In Europe the single currency had a topsy turvy session, weakening in the morning after preliminary data showed that the annual rate of inflation in the euro zone fell to the lowest level since November 2009 in March.

The shock drop raises expectations the European Central Bank will take radical action to stop the threat of deflation in the currency bloc at its upcoming policy meeting on Thursday.

However, some investors expect the ECB to leave monetary policy on hold on Thursday, after Bundesbank head Jens Weidmann said Saturday that the euro zone is not in a deflationary cycle, and that the slowdown was due in large part to temporary factors, such as falls in food and energy prices.

The euro recovered later in the session, after Fed Chair Yellen’s dovish comments about the U.S. economy.  EUR/USD ended the session up 0.16% at 1.3775, up from a low of 1.3724.

In the U.K. the pound took advantage of this mornings Chicago PMI miss, climbing to more than two-week high against the dollar. With GBP/USD closing up 0.22% to 1.6676.

Elsewhere, the New Zealand dollar gained on the U.S. dollar after Yellen’s dovish comments, despite data showing that the ANZ business confidence index for New Zealand slipped to 67.3 in March, from a reading of 70.8 the previous month.

NZD/USD ended the session up 0.18% to 0.8672.

While the Australian dollar remained close to a four month high against the greenback, with AUD/USD climbing 0.25% to 0.9271.

Finally, the Canadian dollar strengthened after official data showed that Canada’s economy expanded 0.5% in January, ahead of expectations for growth of 0.4%.

On a year-over-year basis, Canada’s economy expanded 2.5% in January, following growth of 2.4% in the preceding month.

USD/CAD ended the session down 0.11% at 1.1048.