Dollar edges higher before Fed decision

London

THE dollar held near a seven-week high against the Japanese yen on Wednesday before the outcome of a Federal Reserve meeting where officials are widely expected to cut interest rates by a quarter of a percentage point.

"The focus will be on the policy outlook and the Fed's dot plots, and with market positioning broadly neutral, it should be a quiet session for the dollar," said Thu Lan Nguyen, a currency strategist at Commerzbank in Frankfurt.

Against the yen, the dollar edged up 0.1 per cent to 108.23 yen, just below a seven-week high of 108.37 yen tested overnight. The dollar index against a basket of other currencies crept 0.2 per cent up to 98.43.

With recent economic data proving to be strong - a Citigroup US economic surprise index is holding at its highest levels this year - some market participants are buying the dollar in case the Fed signals a more confident view.

"All in, we think the meeting outcome risks disappointing market expectations, which are perhaps leaning towards a more dovish outcome, resulting in a renewed bid for the dollar," Scotiabank strategists said.

The dollar has been driven more by trade tensions between Washington and Beijing this year than by US monetary policy.

The dollar has gained nearly 1 per cent against the yen since the last rate cut in July.

Morgan Stanley strategists believe that any dollar upside is likely to be capped, because market expectations are not overly dovish and a trade deal between the United States and China seems likely.

A retreat in global oil prices also restored some calm to markets.

Oil prices fell in Asia, extending Tuesday's 6 per cent decline, after Saudi Arabia's energy minister said the kingdom had tapped stockpiles to restore oil supplies to where they stood before weekend attacks shut around 5 per cent of global output.

The euro edged 0.2 per cent lower at US$1.1049, about 1 per cent above the US$1.0927 it reached last week, the lowest in more than two years.

After the Fed releases its policy decision, attention will turn to the Bank of Japan's meeting ending on Thursday, to see whether it eases policy, too.

Deepening negative rates will be an option if the BOJ eases, although the central bank may accompany that with measures to mitigate the pain on financial institutions, sources said. REUTERS