Dollar rises, focus turns to Fed’s rate projections

Dollar reached a three-week high against the yen and stood tall against the euro on Wednesday ahead of a Federal Reserve policy meeting that could give clues on how many more U.S. rate hikes there will be this year.

The Fed concludes its two-day policy meeting later on Wednesday, at which it is widely expected to hike rates for the second time this year.

Market focus is on whether the Fed signals tightening policy four times in 2018, from the three times indicated earlier this year, after the world’s largest economy has expanded steadily.

The dollar index against a basket of six major currencies inched up 0.09 percent to 93.888, after rising 0.25 percent the previous day.

The dollar was 0.25 percent higher at 110.660 yen after brushing 110.68, its highest since May 23.

“There are views that the recent emerging markets turmoil could hold back the Fed from quickening the pace of its rate hikes. So the dollar would benefit if the Fed actually signals readiness to hike four times this year,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

The euro was flat at $1.1745 after slipping 0.35 percent overnight.

The near-term direction of the euro is likely to be dictated by the Fed session and Thursday’s European Central Bank policy meeting.

“Expectations were that the ECB will be willing to hasten policy normalization,” Yamamoto at Mizuho Securities said. “However, I believe such expectations are overdone and the meeting could disappoint those hoping for hawkish rhetoric, which would explain the euro’s recent weakness.”

Speculation that the ECB could signal its intention to start unwinding its massive bond purchasing program pushed up the euro to a three-week high of $1.1840 last week, although the common currency has been unable to sustain those gains.

“Even if the ECB does sound hawkish, that could raise Italian bond yields by pushing up German yields, ultimately limiting any gains for the euro,” said Makoto Noji, senior strategist at SMBC Nikko Securities in Tokyo.

The euro has tended to show an inverse correlation with Italian bond yields.

The currency slid sharply when Italian yields soared late in May as political turmoil in Rome shook the broader markets.

The pound dipped 0.1 percent to $1.3360, unable to hold gains made overnight when it briefly rose to $1.3424.

Sterling had popped higher on Tuesday after British Prime Minister Theresa May saw off a rebellion in parliament over amendments to a bill for the country’s exit from the EU next year.

The Australian dollar shed 0.1 percent to $0.7565 and the New Zealand dollar was little changed at $0.7005.

Source: Reuters

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