* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E
By Saikat Chatterjee
LONDON, June 14 (Reuters) - The dollar held firm on Monday after posting its biggest weekly rise in six weeks as traders cut their bearish bets before a much-anticipated U.S. Federal Reserve meeting that might signal a change in the outlook for U.S. monetary policy.
Currency markets settled in tight ranges with implied volatility plumbing to multi-year lows after last week's strong inflation readings and a dovish European Central Bank meeting failed to dislodge currencies from recent trading levels.
"Many currency pairs have been in incredibly tight ranges for weeks, if not months, now and though we can't see that continuing for too much longer, sadly it's too hard to call a likely side for now," said John Marley, CEO of forexxtra, a London-based FX consultancy.
The Fed begins a scheduled two-day policy meeting on Tuesday. Nearly 60% of economists in a Reuters poll said a much-anticipated taper announcement will come in the next quarter, despite a patchy recovery in the job market.
Recent data pointing to a surge in inflation has raised concerns that price pressures following the post-COVID economic reopening could force policymakers into an earlier tapering of currency-depreciating stimulus.
While consensus expectations are the Fed will remain on hold until 2023, some believe the failure of the dollar to weaken in recent days despite inflation-adjusted U.S. bond yields softening further signals a broader caution among investors.
Indeed, the dollar has gained in recent weeks even as yields on benchmark 10-year U.S. Treasury notes fell to more than three-month lows of 1.42% on Friday.
"Market participants are wary of a hawkish surprise that could at least temporarily lift the U.S. dollar," MUFG strategists said in a daily note.
Against a basket of its rivals, the greenback edged higher to 90.5 after rising as much as 0.4% last week, its biggest weekly rise since early May.
The dollar's gains were aided by some unwinding of short dollar bets. In the week ended June 8, speculators had ratcheted up net short positions to the highest in nearly three months at $18.35 billion.
Caution ahead of the Fed meeting also pushed a Deutsche Bank gauge of implied currency-market volatility to the lowest since February of last year, dropping around 10% since the start of the month.
The British pound was the biggest loser among developed currencies on news that Britain was set to delay the end of social distancing measures as the government tries to slow a rapid rise in COVID-19 infections.
Against the dollar and the euro, the pound weakened as much as 0.2% in early London trading.
In cryptocurrencies, bitcoin traded above $39,000 after getting an almost 10% lift on Sunday, when Tesla Inc CEO Elon Musk tweeted that the electric carmaker will allow bitcoin transactions again when miners who verify transactions use more renewable energy.
(Reporting by Saikat Chatterjee; Editing by Catherine Evans and Bernadette Baum)