US dollar holds firm before Fed outcome

London

THE dollar held firm on Wednesday and hit a three-week high against the Japanese yen before a US Federal Reserve policy announcement that investors will scan for clues on how many more rate hikes there will be this year.

The Fed concludes its two-day policy meeting later on Wednesday and is widely expected to hike rates for the second time this year. Market expectations are for another couple of hikes through the remainder of 2018.

Reports that Fed chair Jerome Powell was considering holding a news conference and taking questions after every Fed meeting also supported the dollar as it raised expectations that the Fed could hike rates more often. The central bank currently holds a news conference after every other meeting.

Investors are focused on whether the Fed signals tightening policy four times in 2018, from the three times indicated earlier this year, after the world's largest economy has expanded steadily.

Tighter monetary policy in the United States and reduced expectations of rate rises elsewhere sent the dollar on a six-week long rally, but that run has since fizzled.

Analysts are divided on whether the Fed meeting will further boost the dollar, with the focus set to shift to a European Central Bank policy meeting on Thursday.

"The FOMC (Federal Open Market Committee) continues to shift to a neutral policy stance from an accommodative one, and we expect the committee to remove the forward guidance on rates remaining below their longer-run rate. Gradual policy tightening is already well priced by the market, so we do not expect the dollar to benefit," BNP Paribas analysts said.

The dollar index traded flat at 93.801 after earlier inching up 0.1 per cent.

The greenback fell 0.2 per cent versus the euro to US$1.1762, while gaining 0.2 per cent against the yen to 110.58 yen after brushing 110.68, its highest since May 23.

Speculation that the ECB could signal its intention to unwind its massive bond purchasing programme in 2018 lifted the euro to a three-week high of US$1.1840 last week and prompted some strategists to become more bullish on the euro.

"The euro is trading towards the bottom end of recent ranges and we expect the currency to strengthen from these levels, particularly against the dollar," said Paul Bednarczyk, head of G-10 FX at Continuum Economics in London. REUTERS