US dollar holds steady before Fed meeting

London

THE US dollar was steady on Wednesday, with currency markets generally quiet ahead of a US Federal Reserve meeting, where investors were awaiting any sign of response to the jump in inflation.

At 10.36am GMT, the US dollar was flat on the day against a basket of currencies, at 90.529. On Tuesday, it hit a one-month high of 90.677, despite mixed US economic data. The euro was little changed against the greenback, at US$1.21185.

US retail sales dropped more than expected in May, but sales in April were revised sharply up and are well above their pre-pandemic level. Separate data showed that wholesale price inflation accelerated to 6.6 per cent. Consumer price data last week showed the sharpest rise in more than a dozen years.

"If (Fed chair) Jerome Powell sounds hawkish after all, the US dollar reaction is going to be more pronounced," said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, about the Federal Open Market Committee (FOMC) meeting. "Because the market is preparing more for large potential moves it then makes sense that EUR-USD will trade closer to 1.21 than to 1.22 until the FOMC meeting."

Ned Rumpeltin, head of European currency strategy at TD Securities, said: "At some point in the next couple of months, the Fed's going to say 'we're talking about tapering' . . . it's an important signpost for the markets - the ship is turning slowly."

He said the Fed faces a "laborious process" of slowly letting the market know about the change in policy direction. "Unless we get a major directional push today, I would say we'll probably find a generally broad equilibrium in FX markets for the next couple of weeks and months."

Risk-related currencies were slightly higher, with the New Zealand dollar up 0.3 per cent at US$0.7144 and the Australian dollar - which is seen as a proxy for risk appetite - up 0.2 per cent at US$0.7703.

The pound was up 0.2 per cent at US$1.4112 after British inflation unexpectedly jumped above the Bank of England's 2 per cent target in May.

In the oil market, Brent crude hit the highest since April 2019 due to a mix of post-pandemic demand and restricted production.

Japan's exports rose at the fastest pace since 1980 in May and a key gauge of capital spending grew, helping the world's third-largest economy offset sluggish domestic demand as Covid-19 vaccinations boost business activity in key markets. The US dollar was a touch lower versus the yen, with the pair changing hands at 109.955. REUTERS