Dollar edges higher as traders await Fed decision

THE dollar ticked up on Wednesday (Jan 25) in subdued trading as investors looked towards the Federal Reserve’s policy decision next week, while the euro traded just below a nine-month high.

The euro was 0.26 per cent lower against the dollar at US$1.086, down from the US$1.093 level reached on Friday, which was the highest since early May.

Meanwhile, the dollar was down 0.32 per cent against the yen, at 129.74 yen per dollar, having hit an 8-month low of 127.22 on Jan 16.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said markets were quiet due to the Chinese New Year holiday and the looming Fed meeting.

“Much of Asia is still on holiday,” Tan said. “We have the Fed coming up very soon and I think there’s a bit of caution ahead of that.”

A drop in global energy prices and a resulting slowdown in inflation in advanced economies has spurred speculation the Fed and other central banks might soon stop raising interest rates.

Those expectations have caused the dollar index, which surged on the back of Fed rate hikes last year, to fall more than 11 per cent from September’s 20-year high of 114.78.

The index was up 0.12 per cent to 102.04 on Wednesday. Sterling fell 0.25 per cent to US$1.231.

Traders broadly expect the Fed to increase rates by 25 basis points (bps) next Wednesday, a step down from a 50 bps increase in December. Before that, investors will scrutinise US fourth-quarter economic growth figures, due on Thursday.

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Data on Tuesday showed eurozone business activity made a surprise return to modest growth in January. Expectations of further rate increases by the European Central Bank have also supported the euro.

German business morale improved in January, according to Ifo Institute survey data released Wednesday, as inflation eased and the outlook brightened.

In contrast, US business activity contracted for the seventh straight month in January, data showed on Tuesday, though the downturn moderated across manufacturing and services for the first time since September.

“(The data) just confirms that, for one, the resilience in Europe ... and the challenges they’ve had in terms of energy, have not been as detrimental as some had expected,” said Rodrigo Catril, a currency strategist at National Australia Bank.

“At the same time, the slowdown in the US, in terms of activity, looks to be broadening.”

Elsewhere, the Australian dollar surged to a more than five-month high on Wednesday after inflation data came in hotter than expected, bolstering the case for further rate increases from the Reserve Bank of Australia.

The Aussie jumped nearly 1 per cent to US$0.7114, its highest level since August.

Meanwhile, the kiwi was down 0.54 per cent to $0.647, after New Zealand’s annual inflation of 7.2 per cent in the fourth quarter came in below its central bank’s 7.5 per cent forecast.

The dollar was little changed against its Canadian counterpart ahead of the Bank of Canada’s latest rates decision at 1500 GMT Wednesday, buying C$1.337. REUTERS