Dollar Edges Lower; Traders Look for Pivot at Fed Meeting

By Peter Nurse – The U.S. dollar weakened in early European trade Tuesday as traders weighed the likelihood that the Federal Reserve signals a less aggressive interest rate tightening path at the end of its latest policy meeting on Wednesday.

At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower at 110.993, retreating from a two-decade high of 114.78 at the end of September.

The Fed is widely expected to deliver another 75 basis point rate hike after the conclusion of its latest policy-setting meeting on Wednesday, its fourth such increase in a row.

However, the size of December’s hike is open to debate, with expectations growing that signs of economic weakness will persuade the Fed policymakers to agree to a smaller rate hike, probably of 50 basis points.

The Bank of Canada unexpectedly slowed its pace of rate increases last week, lifting its benchmark overnight lending rate by 50 basis points, instead of the three-quarter move expected, while the Reserve Bank of Australia raised interest rates by just 25 basis points earlier Tuesday, even as it hiked its inflation forecast and trimmed its GDP outlook.

AUD/USD rose 0.3% to 0.6420, paring earlier sharp gains amid concerns the central bank was growing lax on inflation after recent data showed that Australian inflation grew by a more than expected 7.3% to a 32-year high in the third quarter.

EUR/USD rose 0.3% to 0.9916, with pressure remaining on the European Central Bank to continue raising interest rates, following last week’s 75 basis points hike, after Monday’s data showed Eurozone inflation came in at 10.7% in October, a new record.

However, “with global growth under pressure from tighter rates and a misfiring Chinese economy, we think the Eurozone and the euro will continue to struggle. That is why last Thursday’s high of 1.0089 in EUR/USD could have been significant,” said analysts at ING, in a note.

“A close back under the 0.9900/9910 area this week would support our preferred view of EUR/USD retesting the lows near 0.95.”

GBP/USD rose 0.3% to 1.1507, ahead of Thursday’s Bank of England meeting, which is widely expected to result in another increase in interest rates with inflation running at double digits.

USD/JPY fell 0.5% to 147.97, after Japanese authorities confirmed that the country spent a record $42.8 billion on currency intervention this month to prop up the yen.

Finance Minister Shunichi Suzuki stated Tuesday, again, that authorities are closely watching market moves and will not tolerate “excessive currency moves driven by speculative trading”.

USD/CNY fell 0.2% to 7.2889, retreating from a near 15-year high, helped by a general improvement in risk sentiment, even as the central bank fixed the official guidance rate above 7.2 for the first time since the global financial crisis of 2008.