US dollar perches at one-week high vs yen

London

THE US dollar held comfortably at a one-week high against the Japanese yen on Tuesday as investors positioned for the outcome of a US Federal Reserve policy decision on Wednesday where it is widely expected to raise interest rates.

With a quarter-point hike - its sixth since the Fed began raising interest rates in late 2015 - baked into market prices, major currencies were mired in broad ranges.

"Euro/dollar is being buffeted by cross currents, especially as both central banks (Fed and the ECB) are normalising policy but it needs an unexpected policy action to jolt markets out of current ranges," said Neil Jones, Mizuho's head of currency hedge fund sales in London.

Markets expect two more rate hikes after Wednesday for the remainder of the year, although analysts warn that if a majority of Fed policymakers forecast a total of four increases this year in their projections then the US dollar could gain.

Along with some expectations of a more confident-sounding Fed, a sharp drop in a confidence survey among German investors also weighed on the single currency. The ZEW research institute said its monthly survey showed economic sentiment among investors dropped to 5.1, its lowest reading in a year and a half, from 17.8 in the previous month. The consensus forecast in a Reuters poll was for 13.0.

The single currency was down 0.3 per cent below the US$1.23 line and hovering just above a three-week low of around US$1.2260. The US dollar edged 0.43 per cent higher against a basket of currencies to 90.15, nearly reversing a 0.5 per cent drop the previous day thanks to a relief rally in sterling after a transition deal was announced and the euro's bounce.

The common currency had drawn strength on Monday from a source-based Reuters report that ECB policymakers are shifting the focus of their debates. Policymakers are comfortable with market forecasts, including for a rate hike by the middle of 2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained, given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.

The US dollar was trading 0.4 per cent higher against the yen at 106.52 yen. REUTERS