The dollar held its recent gains in Asian trading on Wednesday as investors looked towards a key Federal Reserve policy meeting to see if it would reinforce growing market expectations for earlier and additional rate rises next year.
The dollar index which measures the greenback against six major peers was at 96.557, having gained 0.5% so far this week in choppy trading. It is testing last week’s 96.954, which would be a two-week top.
The dollar’s gains have been broad-based, though daily moves were muted ahead of the Fed decision.
The euro last traded at $1.1264, not far from $1.1184 hit in November, which was its lowest in over a year. The pound languished at $1.12350 as Britain grapples with rising cases of the Omicron variant of the new coronavirus.
But the Federal Reserve meeting due to wrap up later in the day stood out as the centrepiece of a week full of central bank meetings.
Kim Mundy, currency strategist at CBA, said currency markets were “taking a tiny break from Omicron” even though it was “very much bubbling away in the background.”
“It’s hard for it to be the dominant focus when you’ve got the FOMC, and the Bank of England and European Central Bank lining up to make policy decisions,” said Mundy.
She said traders were watching the U.S. Federal Open Market Committee for two things: firstly whether they accelerate tapering of their bond buying programme, and secondly whether policymakers bring forward their projections for interest rate rises, in their so-called “dot plot”.
Markets have been pricing for the Fed to wrap up bond-buying around March and then proceed with one or maybe two rate hikes in 2022. [FEDWWATCH]
Markets currently expect the Fed to say it will taper its asset buying by between $25 billion-$30 billion a month from $15 billion currently https://www.reuters.com/business/federal-reserves-taper-how-does-it-work-2021-11-03.
“That leaves a very high bar for the Fed to deliver a ‘hawkish surprise’, so (the dollar) could be vulnerable to intraday slippage,” said analysts at Westpac in a note.
“But even if the Fed merely matches elevated expectations, they are still streets ahead of the ECB.”
ECB officials are set to call time on the central bank’s Pandemic Emergency Purchase Programme (PEPP), but investors will look to see how the six-year old Asset Purchase Programme (APP) may pick up the slack.
Elsewhere, a Reuters poll showed analysts have reversed earlier expectations that the Bank of England will raise rates on Thursday, because of the spread of Omicron in Britain. [BOEWATCH]
The yen softened slightly to 113.74 per dollar, continuing a weakening trend. The safe-haven currency had firmed sharply in late November, when the Omicron variant first emerged.
The Australian dollar was at $0.7107, little moved by activity data from China, Australia’s largest trading partner. The data showed factory output grew faster than expected but retail sales slowed.
The Canadian dollar was weaker at 1.2843 per dollar, having been bruised by oil prices coming off recent peaks. [O/R]