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US Dollar dips before Fed rate decision

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The US dollar inched down on Wednesday in the run-in to the Federal Reserve's policy statement later in the day, with an almost one per cent fall this week showing minimal expectations the Fed will ramp up its forecasts for future rises in interest rates.

[LONDON] The US dollar inched down on Wednesday in the run-in to the Federal Reserve's policy statement later in the day, with an almost one per cent fall this week showing minimal expectations the Fed will ramp up its forecasts for future rises in interest rates.

The Fed is seen as all but certain to raise its main rate by a quarter point to 0.50-0.75 per cent. It will be Chair Janet Yellen's tone, and new forecasts for future rates, that will drive the market response.

Talk among traders this week has focused on the risks of policymakers expressing concern at the US dollar's gains or alternatively ramping up the predicted pace of future rate hikes in response to President-elect Donald Trump's spending plans.

The US dollar was just over 0.1 per cent down against a basket of currencies in midday trade in Europe. The euro inched up to US$1.0645 and the yen rose 0.2 per cent to 114.93 to the US dollar.

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Market voices on:

"Last year's template was for dollar long positions to be pared into the (rate rise) event," said Jeremy Stretch, head of currency strategy with CIBC in London.

"This time it has been slower but overall I think we are seeing some lightening of positions. If you have been riding the dollar rally, it makes sense to take some money off the table and come back once the dust has settled."

The major investment banks are mainly upbeat on the US dollar's prospects for next year after a bullish month following Mr Trump's election. Higher inflation expectations have encouraged more bullish forecasts for US rates next year, and Fed policymakers may play into that by raising their own predictions.

But the pullback this week points to doubts on any push past parity with the euro. Investors also seem more nervous about further weakening the market's safe haven of choice, the yen, given a raft of political risks to global growth next year.

"Medium to long-term dollar strength is likely but it must not happen too quickly," analysts from Germany's Commerzbank said in a note to clients.

"Euro-dollar parity over the next couple of months for example would be too much."

Goldman Sachs strategists called for the US dollar to rise after the decision

"For us as dollar bulls, it is not whether the Fed hikes or not at a given meeting that matters, but rather what kind of overall hiking cycle it communicates," they said in a note.

"Given that some kind of fiscal stimulus is likely, we think market pricing should be somewhere between two and three hikes for next year, not between (currently priced) one and two."

REUTERS

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