Dollar Edges Lower; Looming Fed Decision Limits Volatility

By Peter Nurse – The U.S. dollar edged lower in early European trade Wednesday, with traders cautious ahead of the conclusion of a crucial Federal Reserve meeting.

At 04:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 111.225, not far below Tuesday’s high of 111.78, the strongest level since Oct. 25.

The Fed is widely expected to deliver another 75 basis point rate hike later Wednesday, its fourth such increase in a row. But the market is split over the size of December’s hike, particularly after recent suggestions from Fed officials of a potential slowdown in the tightening pace.

That said, the central bank could easily stick to its aggressive tightening path for rates as a result of the still-tight labor market and lack of any signs of an easing in core inflation.

“Our base case is for the Fed to hike at a reduced, 50bp pace at the December meeting,” said analysts at ABN Amro, “thereafter, we expect a pause in tightening.”

“However, we doubt the Fed will be in a hurry to signal this at the coming meeting. If the Fed does opt to signal a smaller rate hike in December, it will likely accompany this with language suggesting rates may have to go higher than previously thought.”

The dollar still has enough strength left to reclaim or surpass its recent highs and resume its relentless rise, according to a poll of currency strategists by Reuters, suggesting that its retreat is temporary.

EUR/USD rose 0.1% to 0.9879, close to the prior session’s one-week low at 0.9853, ahead of the release of the final PMI data for the Eurozone later in the week, which should illustrate that the region is heading towards a recession.

GBP/USD rose 0.1% to 1.1499, ahead of Thursday’s Bank of England policy meeting, with the markets expecting an interest rate increase of 75 bps, and consumer inflation hitting double figures in September.

USD/JPY fell 0.7% to 147.26, with traders on intervention watch after Japanese authorities confirmed that the country spent a record $42.8 billion on currency intervention this month to prop up the yen.

Bank of Japan Governor Haruhiko Kuroda also helped the yen by saying that a tightening of the bank’s ultra dovish policy could be possible if inflation eases in the country.

AUD/USD rose 0.3% to 0.6414, while USD/CNY edged lower to 7.2756, with the yuan helped by unconfirmed reports that Chinese authorities are considering relaxing the country’s tight COVID policy which has weighed on economic activity this year.