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US dollar consolidates gains after hitting 3½-mth high

London

THE dollar consolidated gains on Wednesday after hitting a 3½-month high in the previous session as investors waited for the outcome of a US Federal Reserve policy meeting at which policymakers may outline the future path for interest rates.

Although financial markets don't expect any change in US monetary policy, investors will look for any comments that take into account the impact of a stronger dollar and higher yields on monetary policy. Any evidence of increased caution is likely to stop the dollar's rally in its tracks.

"The dollar is charging hard into tonight's FOMC meeting where the bar is now much higher for the Fed to surprise on the hawkish side," said John Hardy, head of FX strategy at Saxo Bank.

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Against a basket of its rivals, the dollar surged past its 200-day moving average on Tuesday, a level it hasn't traded above since May 2017, and a level which typically attracts some reassessment from large institutional investors on their dollar positions, according to Morgan Stanley.

On Wednesday, it was trading flat at 92.39 after hitting a Jan 10 high of 92.57 in the previous session.

"Despite the moves we have seen in the dollar in recent days, financial conditions haven't really tightened noticeably but that may change if the rally continues," said Manuel Oliveri, an FX strategist at Credit Agricole.

While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to raise borrowing costs next month, given signs of possible acceleration in the US economy, and possibly two more times over the remainder of the year.

The Institute for Supply Management (ISM) survey published on Tuesday showed US factory activity slowed in April, but it highlighted shortages of skilled workers and rising costs, suggesting inflationary pressure is building.

Market expectations are for nearly three more rate hikes until January 2019.

Elsewhere, the euro received some reprieve after posting its biggest weekly loss in more than two months last week after data showed the euro zone's economy slowing as expected in the first quarter of 2018.

Economists said temporary factors were partly behind the weakness and that the economy should continue to expand strongly this year, although some signs that the rebound in the region's economy has peaked have weighed on the euro.

The euro rose 0.1 per cent to US$1.20, up from the lows of US$1.1981 hit earlier this week. REUTERS

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