Dollar Noses Higher As Market Awaits Fed

The U.S. dollar inched higher in a very quiet foreign-exchange market Wednesday, with investors mostly on hold ahead of the Federal Reserve’s policy announcement later in the day.

Midday in East Asia, the ICE dollar index  , a measure of the U.S. currency against six rivals, was at 81.170, up slightly from 81.167 late Tuesday.

Similarly, the WSJ Dollar Index  , which uses a wider comparison basket, edged up to 73.47 from 73.46.

“The U.S. dollar is a little firmer … although all within recent ranges into the [Fed] announcement,” Royal Bank of Canada senior currency strategist Sue Trinh wrote Wednesday.

Trinh said RBC expects the Fed to taper its monthly bond-buying stimulus to $75 billion, down from $85 billion currently, with the reduction split evenly between the central bank’s purchases of U.S. Treasurys and mortgage-backed securities.

Analysts at Crédit Agricole, which has a tapering forecast identical to that of RBC, said the market was now paying more attention to the Fed’s outlook on interest rates.

The Fed is due to offer its rate expectations for 2016, and it has previously said it wanted to see the U.S. unemployment fall to 6.5% from its current 7.3% before it raises the benchmark fed funds rate target from its present 0-to-0.25% range.

The Crédit Agricole analysts said the Fed could mellow its policy stance by lowering the unemployment threshold for a cut to 6%, for instance, a move that would imply a longer period of ultra-low rates, thus sending the dollar lower.

They said that over the past “three days [the market’s] focus appears to have shifted beyond the quantity of Fed tapering towards a potential strengthening of forward guidance,” with a possible lower unemployment target weighing on the dollar.

As a result, the possibility of post-Fed downward pressure on the dollar “may have lessened short-term,” they said.

Meanwhile, BK Asset Management managing director Kathy Lien said the Fed statement could use the guidance or other dovish signals to offset the effect of a taper announcement.

This could “drive the U.S. dollar lower, which the central bank would be happy to see, since a weaker currency supports the economy,” she wrote.

Meanwhile, a decision to delay the taper until December would cause “the dollar to sell off quickly and aggressively,” Lien said.

But on Wednesday, with the Fed statement and accompanying news conference less than 24 hours away, most of the major currency pairs were moving sideways.

The euro  bought $1.3356, almost unchanged from late Tuesday’s $1.3355, while the British pound  was at $1.5903, roughly flat from $1.5904, and the Australian dollar  traded at 93.50 U.S. cents, compared to 93.53 U.S. cents.

Against the Japanese yen, the dollar  bought ¥99.21, up slightly from ¥99.16 late Tuesday.

Source : Marketwatch