Dollar stalls ahead of Fed meeting

New York

THE US dollar lacked direction on Tuesday as traders held off on making big moves ahead of the Federal Reserve meeting concluding on Wednesday, at which policymakers are expected to cut interest rates for the first time since the financial crisis by 25 basis points.

The move would be a so-called insurance cut to protect the US economy from global uncertainties and trade pressures, in contrast to interest rate cuts by countries facing more imminent risks.

Markets will be watching the Fed's forward guidance for clarity on whether the committee sees the cut as a one-off or as the beginning of a rate-cutting cycle.

"The market is on hold waiting for the FOMC meeting. That is expected to be the next driver of price action at a general level," said Shahab Jalinoos, global head of foreign exchange strategy at Credit Suisse in New York.

The euro hovered on Tuesday around the 26-month low it reached last week of US$1.110.

Although the Fed is expected to lower rates, US yields will remain above those in the eurozone, making the dollar a more attractive investment for yield-seeking traders.

The pound was the biggest mover in the foreign exchange market, plunging to a new 28-month low of US$1.212 in Asian trading on growing concerns that Britain could crash out of the European Union without a transition agreement on Oct 31.

Sterling was last down 0.33 per cent at US$1.217.

It was also weaker against the euro by 0.37 per cent at 91.54 pence, having earlier touched a two-year low of 91.88 pence.

"Clearly in the UK, sterling is moving due to local political developments - most importantly the idea that Prime Minister Johnson may not want to meet European leaders unless they change their position, which is a more hard-line stance than the market would have expected as recently as a week ago,"said Mr Jalinoos.

The Japanese yen was last up by 0.21 per cent at 108.54 yen per dollar after the Bank of Japan on Tuesday maintained its pledge to keep short-term interest rates at a negative 0.1 per cent via aggressive bond purchases, as expected.

"The Bank of Japan meeting did not deliver anything materially new. There was a minor change in the wording of the statement, but it does appear that Japan is going to wait and see what materialises from the Fed and ECB before taking action," said Mr Jalinoos. REUTERS