Dollar holds near peaks as Fed taper announcement awaited

By John McCrank and Tommy Wilkes

NEW YORK/LONDON (Reuters) – The dollar edged higher on Wednesday, holding near recent peaks versus the euro and the yen, as traders awaited the U.S. Federal Reserve’s expected announcement on unwinding its pandemic-era stimulus and any word from Chair Jerome Powell on inflationary pressures.

The Fed’s policy statement, which will likely kick off the tapering of its $120 billion-a-month asset purchase program, is due at 2 p.m. Eastern time (1800 GMT), followed by a news conference with Powell.

“Markets will be on the lookout for any discussion about the pace of tapering and any signs that the recent inflation surge has spooked the Fed,” said Mark McCormick, global head of FX strategy at TD Securities.

Any signal that Powell is open to responding with rate hikes to inflation, if the case for it being transitory keeps weakening, would reinforce the supportive U.S. dollar backdrop, he said.

The dollar index was 0.027% higher at 94.135, close to its 2021 peak of 94.563 hit last month.

Moves were small in the overnight session in the middle of a busy week for central banks, with the BOE-BANKS-e57d1808-2900-42bd-832f-d8f2baa8f262>Bank of England meeting on Thursday.

European Central Bank Christine Lagarde said an interest rate rise in 2022 was very unlikely because inflation was too low, sending government bond yields lower. But the euro barely budged.

Against the euro the greenback was down marginally at $1.15715. That was not far from the $1.1522 low for the euro reached in October, which was the strongest level for the dollar since July 2020.

Dollar/yen traded at 113.955, near a four-year high.

INFLATION QUESTION

The Fed announcement follows meetings of the Reserve Bank of Australia on Tuesday and the ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB last Wednesday, both of which pushed back against market pricing of tighter policy.

“The dollar bearish case today is that the tapering is widely expected and an inherently dovish Fed, concerned about upsetting the bond market, does not change its statement substantially,” ING strategists wrote.

“Yet, at some point, the Fed is going to have to acknowledge that elevated inflation does not ‘largely reflect transitory factors’. Many dovish central banks around the world are already doing this and should the Fed start to show greater concern about this today, U.S. rates and the dollar could get a boost.”

The RBA on Tuesday abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes.

The Aussie dropped 1.2% against the dollar on Tuesday and sat at $0.74275 on Wednesday, down 0.01% from the session open. The New Zealand dollar was also dragged 1% lower on Tuesday, but found support on Wednesday from strong labor data and was up 0.37% at $0.7134. [AUD/]

Money markets have dialed back expectations for a 15 basis point hike from the BOE-BANKS-e57d1808-2900-42bd-832f-d8f2baa8f262>Bank of England on Thursday but still expect one before 2022.

“The key question is how effective an interest rate hike will be in controlling inflation, mainly driven by supply chain issues, as we emerge from the pandemic,” said Giles Coghlan, chief currency analyst at HYCM.

The BoE is also focused on labor data and may decide to hold off on rate increases on Thursday, as “they will not want to hike rates too soon and risk crippling businesses’ recoveries,” he said.

Sterling recovered from a two-week low to trade 0.22% higher $1.3642.

(Reporting by John McCrank in New York and Tommy Wilkes in London; Editing by Barbara Lewis, Nick Macfie and Alison Williams)

By John McCrank and Tommy Wilkes

NEW YORK/LONDON (Reuters) – The dollar edged higher on Wednesday, holding near recent peaks versus the euro and the yen, as traders awaited the U.S. Federal Reserve’s expected announcement on unwinding its pandemic-era stimulus and any word from Chair Jerome Powell on inflationary pressures.

The Fed’s policy statement, which will likely kick off the tapering of its $120 billion-a-month asset purchase program, is due at 2 p.m. Eastern time (1800 GMT), followed by a news conference with Powell.

“Markets will be on the lookout for any discussion about the pace of tapering and any signs that the recent inflation surge has spooked the Fed,” said Mark McCormick, global head of FX strategy at TD Securities.

Any signal that Powell is open to responding with rate hikes to inflation, if the case for it being transitory keeps weakening, would reinforce the supportive U.S. dollar backdrop, he said.

The dollar index was 0.027% higher at 94.135, close to its 2021 peak of 94.563 hit last month.

Moves were small in the overnight session in the middle of a busy week for central banks, with the BOE-BANKS-e57d1808-2900-42bd-832f-d8f2baa8f262>Bank of England meeting on Thursday.

European Central Bank Christine Lagarde said an interest rate rise in 2022 was very unlikely because inflation was too low, sending government bond yields lower. But the euro barely budged.

Against the euro the greenback was down marginally at $1.15715. That was not far from the $1.1522 low for the euro reached in October, which was the strongest level for the dollar since July 2020.

Dollar/yen traded at 113.955, near a four-year high.

INFLATION QUESTION

The Fed announcement follows meetings of the Reserve Bank of Australia on Tuesday and the ECB-POLICY-KAZIMIR-00b06d9b-4b99-46ce-a2aa-458d8eb2d993>ECB last Wednesday, both of which pushed back against market pricing of tighter policy.

“The dollar bearish case today is that the tapering is widely expected and an inherently dovish Fed, concerned about upsetting the bond market, does not change its statement substantially,” ING strategists wrote.

“Yet, at some point, the Fed is going to have to acknowledge that elevated inflation does not ‘largely reflect transitory factors’. Many dovish central banks around the world are already doing this and should the Fed start to show greater concern about this today, U.S. rates and the dollar could get a boost.”

The RBA on Tuesday abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes.

The Aussie dropped 1.2% against the dollar on Tuesday and sat at $0.74275 on Wednesday, down 0.01% from the session open. The New Zealand dollar was also dragged 1% lower on Tuesday, but found support on Wednesday from strong labor data and was up 0.37% at $0.7134. [AUD/]

Money markets have dialed back expectations for a 15 basis point hike from the BOE-BANKS-e57d1808-2900-42bd-832f-d8f2baa8f262>Bank of England on Thursday but still expect one before 2022.

“The key question is how effective an interest rate hike will be in controlling inflation, mainly driven by supply chain issues, as we emerge from the pandemic,” said Giles Coghlan, chief currency analyst at HYCM.

The BoE is also focused on labor data and may decide to hold off on rate increases on Thursday, as “they will not want to hike rates too soon and risk crippling businesses’ recoveries,” he said.

Sterling recovered from a two-week low to trade 0.22% higher $1.3642.

(Reporting by John McCrank in New York and Tommy Wilkes in London; Editing by Barbara Lewis, Nick Macfie and Alison Williams)