Dollar holds breath before Fed outcome

LONDON (Reuters) – The dollar held firm on Wednesday and hit a three-week high against the Japanese yen before a U.S. Federal Reserve policy announcement that investors will scan for clues on how many more rate hikes there will be this year.

U.S. dollars and other world currencies lie in a charity receptacle at Pearson international airport in Toronto, Ontario, Canada June 13, 2018. REUTERS/Chris Helgren

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.

U.S. dollars and other world currencies lie in a charity receptacle at Pearson international airport in Toronto, Ontario, Canada June 13, 2018. REUTERS/Chris Helgren

“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 .DXY traded flat at 93.801 after earlier inching up 0.1 percent.

The greenback fell 0.2 percent versus the euro EUR= to $1.1762, while gaining 0.2 percent against the yen to 110.58 yen JPY= after brushing 110.68, its highest since May 23.

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

FILE PHOTO: United States one dollar bills are seen on a light table at the Bureau of Engraving and Printing in Washington November 14, 2014. REUTERS/Gary Cameron/File Photo

“The euro is trading toward 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 G10 FX at Continuum Economics in London.

Emerging market currencies fell as the looming Fed rate hike hit Turkey’s lira TRY= and South Africa’s rand ZAR=. Countries like Turkey with large external financing needs are particularly vulnerable to rise dollar funding costs.

The British pound dipped to a one week low of $1.3322 GBP=D3, unable to hold gains made overnight when it briefly rose to $1.3424 after British Prime Minister Theresa May saw off a rebellion in parliament over amendments to a bill for the country’s exit from the European Union next year.

Slower-than-expected inflation numbers published on Wednesday also hurt the pound, as it weakens the case for a Bank of England rate rise in August.

The Canadian dollar, which has fallen heavily in recent weeks on concerns an escalating trade dispute with the United States would hit its northern neighbor’s economy hard, fell another 0.1 percent to C$1.3027 CAD=, not far from almost three-month lows of C$1.3068.

The Norwegian crown rallied for a second consecutive day against the dollar NOK= and the euro EURNOK=, hitting its strongest against the single currency since late October after an upbeat central bank survey raised expectations of tighter monetary policy.

Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Toby Chopra/Keith Weir

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