Dollar prices held firm on Wednesday, as a wait-and-see mood prevailed, with traders looking ahead to the outcome of the Federal Reserve’s meeting later in the day when policymakers are expected to cut interest rates for the first time since 2008.
With the Fed expected to reduce its key rate by 25 basis points (bps), the main focus is on whether it will leave the door open for further policy easing to insulate the world’s largest economy from slowing global growth and the fallout from trade conflicts.
“The Fed will likely try and not dash the prospect of a future rate cut held by the markets. But at the same time Chairman (Jerome) Powell is certainly not in a position to promise an upcoming cut, so he is expected to keep his wording as vague as possible,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
“Any vague policy references would provide the dollar with an extra lift as it would further temper excessive easing hopes.”
CME’s FedWatch Tool shows 78% of traders pricing in a 25 bp cut. But the remaining 22% still see a deeper 50 bp easing as a possibility.
The federal funds rate is currently set in a range of 2.25% to 2.50%. Futures traders have priced in a full percentage-point drop by the end of next year.
The dollar index against a basket of six major currencies stood little changed at 98.055 after pulling back from a two-month high of 98.206 touched on Tuesday.
The greenback was flat at 108.575 yen and the euro was little changed at $1.1154. The Bank of Japan (BOJ) on Tuesday refrained from expanding stimulus but committed to doing so “without hesitation” if a global slowdown jeopardizes the country’s economic recovery.
“It was natural for the BOJ to preserve its remaining ammunition when currencies, the most important factor impacting its policy, are stable,” said Daisuke Karakama, chief market economist at Mizuho Bank.
“But if the Fed and the ECB both cut rates in September, it might become difficult for the BOJ to weather the situation by merely tweaking its policy language.”
The pound, which has tumbled this week as investors rushed to factor in the possibility of Britain leaving the European Union without a deal, managed to stabilize somewhat.
Sterling was a shade firmer at $1.2153, crawling back from a 28-month trough of $1.2120 plumbed on Tuesday.
Troubles for the currency, which has lost 4.3% in July, were still seen to be far from over as Britain’s new prime minister Boris Johnson took over with the explicit agenda of pulling the country out of the EU by Oct. 31, whether transitional trading agreements are in place or not.
The Australian dollar managed to crawl back from a six-week low and edged up after data showed that the domestic second quarter consumer price index (CPI) rose at a slightly faster pace than expected.
The Aussie was up 0.25% at $0.6889 after brushing $0.6832 earlier, its lowest since June 19.
The New Zealand dollar, in contrast, fell after a survey showed the country’s business mood fell to an 11-month low in July, adding to expectations for a rate cut next week.
The kiwi slipped 0.3% to $0.6594.
Source: Reuters
