Euro builds on recovery as dollar pauses during Fed meet

London

THE euro made further gains on Wednesday as dollar bulls paused before the end of the Federal Reserve's two-day policy meeting.

Trading was thin with holidays in much of Asia and Europe and most currency pairs traded within tight ranges, although the New Zealand dollar dropped heavily in Asian trading after weak jobs data heightened expectations that interest rates would fall.

The Fed meeting comes after strong US economic data last month pushed the dollar to a two-year high while hurting the euro, where concerns about a slowdown and underperformance in the region's economy had been growing.

Relatively strong economic growth data in the eurozone on Tuesday, however, prompted some short covering from hedge funds that have been betting against the single currency, lifting the euro above US$1.12.

The euro added to those gains on Wednesday, rising 0.2 per cent to US$1.1240, its highest since April 23.

The dollar slipped in London trading, with the index down 0.1 per cent at 97.354, although not everyone thinks the greenback's weakness will persist.

"The risk for this Fed meeting is that, unless the FOMC meets the market's dovish expectation for their stance, we would expect another leg higher in USD," Mizuho strategists said.

The day's big mover was the New Zealand dollar, which fell half a per cent after data showed employment unexpectedly fell in the March quarter, although the jobless rate dropped to 4.2 per cent.

Markets responded by betting a rate cut was more likely. The Reserve Bank of New Zealand, which holds a policy meeting next week, has already said its next move was likely to be down. The kiwi recovered from earlier lows and was last down 0.2 per cent at US$0.6662.

The Australian dollar gained 0.1 per cent to US$0.7059 .

Accommodative monetary policy throughout much of the world has kept volatility contained across financial markets and demand for riskier assets elevated.

"Currencies benefiting from strong global growth combined with low inflation pressures have caught a bid," Morgan Stanley analysts said, listing the pound and the Indian rupee as both countries are dependent on capital inflows to fund their current account deficits.

Sterling extended its rally to hit a new two-week high, supported by growing optimism that the ruling Conservative and opposition Labour parties can break the Brexit deadlock in their negotiations over how to leave the European Union.

The pound rose 0.3 per cent to US$1.3075, leaving it up 1.7 per cent since Monday. The Bank of England holds its policy meeting on Thursday, where it is expected to keep rates unchanged.

The Japanese yen strengthened 0.1 per cent to 111.31 yen per dollar in quiet trading. Japanese markets are closed for a string of public holidays. REUTERS