Dollar steadies as traders eye Fed for interest rate clues

The dollar struggled to gain traction on Wednesday, with investors awaiting the outcome of a Federal Reserve meeting for clues whether bets on a single U.S. interest rate rise in 2016 are justified.

Australia’s dollar meanwhile hit a three-week high AUD=D4 after one measure of domestic inflation came in slightly higher than expected, and as less jittery global markets gave a small boost to appetite for riskier currencies.

But Wednesday’s main focus will be on the statement released by the Fed after its Jan. 26-27 policy review. While the U.S. central bank is almost certain to keep interest rates unchanged, investors are keen to see its latest economic outlook given the turbulent start to global financial markets this year.

With Fed fund futures <0#FF:> implying just one rate hike this year, compared with four hikes according to Fed policymakers’ own rate guidance, the risk is that anything the Fed says may be interpreted as hawkish.

“The market isn’t expecting anything particularly hawkish today so obviously anything that did appear hawkish would certainly be a bit of a surprise and would give the dollar a bit of additional support,” said Rabobank currency strategist Jane Foley, in London.

“But I think the real question is: how dovish? How concerned are they (Fed policymakers) really about inflation and how much do global growth concerns feature in their discussions?”

The dollar index =USD .DXY last stood flat at 99.074, nursing a 0.3 percent loss recorded on Tuesday and staying well below a seven-week high of 99.799 set last Thursday.

More central bank policy decisions are coming up this week, with the Reserve Bank of New Zealand (RBNZ) announcing its decision in the European evening, and the Bank of Japan’s (BOJ) policy statement due on Friday.

The New Zealand dollar was flat at $0.6497 NZD=D4 ahead of the RBNZ decision, with most analysts expecting interest rates to be left on hold for now.

The Australian dollar rose to as high as $0.7052 before easing back to $0.7027, still leaving it up 0.3 percent on the day. While measures of underlying inflation slowed to the floor of the Australian central bank’s target range, speculators had been positioned for a weaker number.

“Underlying inflation this low is usually a recipe for an RBA cash rate cut. But not this time: or at least not yet,” chief economist for Australia and New Zealand at HSBC, Paul Bloxham, said in a research note.

The Swiss franc was 0.1 percent up against the euro at 1.0390 francs EURCHF=EBS, having the previous day hit its weakest since the cap on the currency was lifted a year ago.

Source: Reuters