Written by Tom Westbrook
SINGAPORE (Reuters) – The dollar faltered on Wednesday, while the yen lost ground again as investors made last-minute changes to positions ahead of a policy meeting expected to kick off a round of U.S. easing.
The Federal Reserve is expected to make its first interest rate cut in more than four years at 1800 GMT, with markets pricing in a 2/3 chance of a 50 basis point cut.
The dollar has fallen along with US yields since July and at $1.1125 per euro is not far from the annual low of $1.1201 on expectations that the US is easing a bit, with more than 100 basis points of rate cuts by Christmas.
The yen, up 12% since July, has been rising because the Bank of Japan – which sets policy on Friday – has been hiking rates at the same time as the Fed prepares to cut.
It rose about 0.7% to 141.41 a dollar on Wednesday, recovering part of the overnight decline. The yen rose 0.6% to 157.37 per euro.
Elsewhere, the Australian dollar briefly touched a two-week high at $0.6773, while rising milk prices supported the New Zealand dollar at $0.6202, although moves were heavy ahead of the Fed meeting. [AUD/]
Traders say the Fed’s tone and the size of the rate cut will drive the reaction in the foreign exchange market.
“A dovish Fed in the simplest sense should lead to a weaker dollar,” said Nathan Swami, head of currency trading at Citi in Singapore.
But an overly hawkish Fed, Swami said, could keep markets in a tailspin if it appears to be anticipating a worse-than-expected recession, and in that case critical and emerging market funds could face tough conditions.
US retail sales unexpectedly rose 0.1% in August, the data showed overnight, against forecasts of a 0.2% decline and the Atlanta Fed’s closely followed GDPNow estimate rose to 3% from 2.5%, we support perhaps the case for less Fed cuts.
Chinese markets resumed trading on Wednesday after a mid-autumn festival break, with the yuan trading at its strongest since January. The currency was steady at 7.0975 per dollar in early trade. [CNY/]
Sterling, the best performing G10 currency for the year, held at $1.3164 where its rally was driven by signs of a stable economy and sticky inflation. British inflation data will be needed later, and on Thursday the Bank of England appears to be leaving rates at 5%, with a 35% chance of a cut.
The final inflation figures for Europe should also, however, not be expected to deviate much from the initial figures for August so all eyes will be on the Fed.
“With markets betting on a 41bp cut, which is a long way from the naysayers (25bp or 50bp), volatility seems certain,” ANZ Bank analysts said in a note to clients.
