US dollar takes breather, investors anxious about Fed rates outlook

[TOKYO] The US dollar took a breather on Wednesday as investors looked to whether the Federal Reserve will signal any acceleration in the pace of future rate increases to deal with an expected ramp-up in fiscal spending under President-elect Donald Trump.

In its policy meeting ending later in the day, the Fed is all but certain to raise its interest rate target by 0.25 percentage point to 0.50-0.75 per cent, which would be just the second rate hike since the financial crisis in 2007-08, following the tightening last December.

"The markets think a rate hike is a certainty so the focus is on the outlook for next year. I think they will maintain their previous projections to raise rates twice next year but if they turn more hawkish, the US dollar will test its upside again,"said Shinichiro Kadota, chief FX strategist at Barclays.

The US dollar's index against a basket of six major currencies stabilised around 101.05 in early Asian trade, having slipped from 101.78 touched early on Monday.

The euro traded little changed at US$1.0628, off Monday's one-week low of US$1.0525.

Against the yen, the US dollar traded at 115.20 yen, backing off a tad from Monday's 10-month peak of 116.12 yen.

Some players were eager to take profits from the US dollar's massive rally of about 10 per cent against the yen since the Nov 8 US election.

Expectations that Trump will cut taxes, boost fiscal spending and raise US growth over the near-term lifted US bond yields and stock prices, making the US dollar more attractive.

Inflation is also likely to heat up if Mr Trump moves to implement his more controversial campaign promises, such as deporting illegal immigrants and slapping tariffs, further boosting US bond yields.

Although many investors had long thought the Fed will raise rates very slowly and cautiously, especially under dovish chair Janet Yellen, Mr Trump's surprise election victory last month has drastically shaken up that assumption.

The two-year US debt yield rose to a 6 1/2-year high on Tuesday and US money market futures are pricing in almost two rate hikes next year.

That is a sea change from before the election, when they were not fully pricing in even one rate hike in 2017.

Commodity-linked currencies were supported by strong rises in oil prices after Opec and some of its rivals reached their first deal since 2001 to jointly reduce output to tackle global oversupply.

The Australian dollar traded at US$0.7494, having hit a near one-month high of US$0.7524 on Tuesday.

The Aussie also edged near its March peak of 86.66 yen, a break of which could open a way for a test of above 90 yen touched last year.

The Canadian dollar stood at C$1.3135 per US dollar , after having risen to as high as C$1.3102 to the US dollar on Tuesday, an eight-week high.

The biggest winner in the past few sessions from rallying oil prices was the Russian rouble, which rose 5.4 per cent over the past week against the US dollar to hit a 16-1/2-month high.

The Russian currency is the best performing currency since Mr Trump's upset.

REUTERS