Dollar steady ahead of Fed rate decision

The dollar was steady on Wednesday in the run in to the Federal Reserve’s policy statement later in the day, with an almost 1 percent fall this week showing minimal expectations the Fed will ramp up its forecasts for future rises in interest rates.

The Fed is seen as all but certain to raise its main rate by a quarter point to 0.50-0.75 percent. It will be Chair Janet Yellen’s tone, and new forecasts for future rates, that will drive the market response.

Talk among traders this week has focused on the risks of policymakers expressing concern at the dollar’s gains or alternatively ramping up the predicted pace of future rate hikes in response to President-elect Donald Trump’s spending plans.

After falling a third of a percent in Asian trade, the dollar recovered to stand less than 0.1 percent lower in early European deals.

“Last year’s template was for dollar long positions to be pared into the (rate rise) event,” said Jeremy Stretch, head of currency strategy with CIBC in London. “This time it has been slower but overall I think we are seeing some lightening of positions. If you have been riding the dollar rally, it makes sense to take some money off the table and come back once the dust has settled.”

The major investment banks are mainly upbeat on the dollar’s prospects for next year after a bullish month following Trump’s election. Higher inflation expectations have encouraged more bullish forecasts for U.S. rates next year, and Fed policymakers may play into that by raising their own predictions.

But the minimal pullback this week at very least expresses some doubt on the chances of the dollar pushing past parity with the euro. Investors also seem more nervous about further weakening the market’s safe haven of choice, the yen, given a raft of political risks to global growth next year.

“Medium to long-term dollar strength is likely but it must not happen too quickly,” analysts from Germany’s Commerzbank said in a note to clients. “Euro-dollar parity over the next couple of months for example would be too much.”

The euro EUR= inched down to $ 1.0617, still almost a cent off Monday’s one-week low of $ 1.0525. The dollar dipped 0.1 percent to 115.07 yen, well below Monday’s 10-month high of 116.12 yen.