Dollar Firms With Fed Policy Language Under Intense Scrutiny

Big 5

The U.S. dollar firmed on Wednesday, recovering from a setback in the previous session as investors awaited the Federal Reserve’s latest guidance on U.S. interest rates.

The Fed’s Open Market Committee will conclude its regular two-day policy meeting later in the session, at which it is expected to discuss the timing of the next U.S. rate increase. Policymakers will also release fresh economic and interest-rate projections, extending their forecasts through 2017.

The greenback came under pressure overnight after the Wall Street Journal’s Fed watcher said the U.S. central bank may keep the words “considerable time” in its policy statement, which would disappoint dollar bulls hoping for a more hawkish statement.  

Markets have been bracing for the Fed to drop its promise to keep rates near zero for a “considerable period” after ending its bond-buying program. Fed officials have said they do not expect to raise rates until 2015, but recently strong U.S. economic data has led some of them to acknowledge they may need to act sooner than they previously thought.

The panel may also alter its depiction of the labour market to suggest further progress toward its goal of full employment.

“It’s very difficult for markets to make major moves ahead of the FOMC, until that event is past,” said Ayako Sera, senior market strategist at Sumitomo Mitsui Trust Bank in Tokyo.

“The dollar fell overnight mostly against the euro rather than the yen, as general yen weakness still persists,” she said.

In contrast to the Fed, the Bank of Japan is expected to maintain its ultra-easy monetary stance and could even take additional steps, notwithstanding signs that it could be reaching the limits of its power to reflate the economy. This month, Japan’s central bank bought bills at negative yields, essentially paying banks for the privilege of lending them cash.

Against the yen, the dollar added about 0.1 percent on the day to 107.25 yen JPY=, moving back toward a six-year peak of 107.39 set last Friday after dropping as low as 106.81 yen overnight. The euro drifted down about 0.1 percent to $1.2951 EUR= after climbing to a near two-week high just shy of $1.3000 on Tuesday.

The common currency all but brushed aside a closely watched survey that showed a drop in German analyst and investor morale to lows not seen since December 2012.

The dollar index .DXY edged up to 84.104, moving back toward a 14-month peak of 84.519 touched on Sept. 9, after dropping to a one-week low of 83.864 overnight on speculation of a more dovish Fed statement.

“Thankfully no one anywhere is trading data. We are all trading language. In the U.S. all we care about is ‘considerable period,'” said Graeme Jarvis, an analyst at Westpac.

A notable mover was the Australian dollar, which rallied nearly 1 percent to a high of $0.9112 AUD=D4 on Tuesday, a smart turnaround from a 4-percent slide in the past week. On Wednesday, it gave back about 0.2 percent to trade at $0.9074.

The Aussie was underpinned by reports from news website and the Wall Street Journal stating that China’s central bank is providing 500 billion yuan of liquidity to the country’s top five banks through standing lending facilities. Australia’s currency is often used as a liquid proxy for China plays, as the two countries are major trading partners.

Source : Reuters