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Dollar flat, bides time before Fed policy decision

LONDON - The dollar held steady against major currencies on Wednesday as investors awaited the Federal Reserve’s monetary policy decision for any signals to back up market expectations for an interest rate cut later in the year.

The Fed is set to keep rates on hold at 5.25 percent at its meeting on Wednesday but investors are focused on the accompanying statement to see if policymakers acknowledge signs of weaker economic indicators and the housing market slowdown.

Along with the Fed, the European Central Bank and Bank of England will also meet to set interest rates this week.

At its last meeting in March the Fed removed an explicit reference to possibly tightening monetary policy further and acknowledged that economic indicators had been mixed but said price pressures remained the biggest policy concern.

“I clearly don’t see any need to change policy. They may try to set up a medium-term clarity that they are neutral and try to scale back some worries about inflation,” said Nick Parsons, head of market strategy at nabCapital.

“The risk at the moment is position fatigue. Everyone’s got a view which has been already expressed. The market is short of dollars. Unless we see substantial deterioration in the US economy the risk is that we see position liquidation.”

At 1130 GMT the dollar was flat at 120.01 yen, below a two-month high around 120.50 yen hit last week.

The euro was broadly flat at $1.3530.

The euro was slightly lower on the day against the yen at 162.30 yen, pulling back from the record high above 163.60 yen hit last week.

The ECB is set to leave interest rates steady at 3.75 percent but is seen signalling a June rate hike. The BoE is expected to raise rates to 5.5 percent, taking UK borrowing costs to the highest in the Group of Seven rich nations.

FOMC focus

The dollar staged a broad rebound on Tuesday as investors adjusted positions ahead of the Federal Open Market Committee’s meeting, bringing the US currency higher from a two-year low against a basket of currencies set earlier this month.

Mixed US data in the past week has shown employment gains in April slowing to the weakest in two years even as factory activity, one of the economy’s soft spots, rebounded last month.

“The FOMC is likely to assuage the market’s fears that the housing downturn in the US will result in broader systemic risks to the financial markets,” Royal Bank of Canada said in a note to clients.

“Unless the FOMC surprises the markets with a shift towards a more hawkish stance we expect a relief rally in euro/dollar.”

Despite its rally to record highs, the euro is only up 2.5 percent since the start of the year.

“Interest rate differentials will continue to narrow as the ECB raises rates and after short consolidation the euro could go higher to $1.38 in the 3-6 month horizon,” said Marcus Hettinger, Global FX strategist at Credit Suisse in Zurich.

The yen posted some gains on Wednesday as investors pared back some carry trade positions, where the low-yielding Japanese currency funds purchases of higher-return assets.

The Australian and New Zealand dollars both edged lower against the Japanese currency as carry trades were trimmed back.

Some traders said Japanese investors were selling dollars to bring home funds tied to some $55 billion of US Treasuries maturing next Tuesday as well as $22 billion of coupon payments.