Dollar prices firm with focus on Fed meeting; kiwi edges higher

The dollar held firm near two-week highs versus a basket of major currencies on Tuesday, with traders awaiting the U.S. Federal Reserve’s policy meeting this week for fresh catalysts.

The dollar index, which tracks the greenback against a basket of six major peers, inched up 0.1 percent to 93.931. That was within sight of Friday’s peak of 94.087, the highest since November 21.

The Fed is widely expected to raise interest rates at its two-day policy meeting that will end on Wednesday and is expected to tighten policy further next year.

Most economists polled by Reuters now expect three more rate rises next year compared with two when surveyed just weeks ago, although the outlook remains clouded by stubbornly subdued inflation.

Since a rate hike this week has been priced in, the dollar could sag initially after the Fed’s policy announcement, said Steven Dooley, currency strategist for Western Union Business Solutions in Melbourne.

The Fed, however, will probably sound optimistic about the economic outlook and that is likely to help underpin the greenback, he added. “Once the initial flurry of short-term volatility rides out, we’re likely to see the U.S. dollar stronger again,” Dooley said, describing how the dollar could react to the Fed’s policy announcement due on Wednesday.

“It seems most likely that the U.S. Federal Reserve will continue to sound optimistic and certainly continue on the path to raise rates three times next year,” Dooley said.

Against the yen, the dollar eased 0.1 percent to 113.48 yen, after having risen to as high as 113.69 yen on Monday, the dollar’s strongest level in about a month.

The dollar could come under pressure if Fed Chair Janet Yellen sounds less confident that inflation will rise toward the central bank’s 2-percent target, in her remarks during a post-meeting news conference, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

Even in that case the market reaction could be limited, however, as investors seek more clarity on the views of incoming Fed chair Jerome Powell, Murata said. The dollar will likely find support at levels around 112.00 yen or so, Murata added.