The Fed's Open Market Committee (FOMC) will conclude its regular
two-day policy meeting later in the session and issue a policy
statement. Policymakers will also release new economic and
interest-rate projections extending through 2017.
The dollar came under pressure late on Tuesday after the Wall Street
Journal said the U.S. central bank may maintain a pledge to keep
near-zero rates in place for a "considerable time". That would
disappoint dollar bulls hoping for a more hawkish statement.
Markets have been bracing for the Fed to drop its promise to keep
rates near zero for such a period after ending its bond-buying
program. Fed officials have said they do not expect to raise rates
until 2015, but recently strong U.S. data has led some of them to
acknowledge they may need to act sooner.
The committee may also alter its depiction of the labor market to
suggest further progress towards its goal of full employment.
"There has been some scaling back of expectations, but we are still
bullish about the dollar going into the FOMC," said Yujiro Goto,
currency strategist at Nomura. "We expect the Fed to start raising
rates from next year onwards and there will be changes to outlook to
growth, inflation, and the dots for interest rate changes."
The dots refer to a chart expressing Fed's expectations of future
In contrast to the Fed, the Bank of Japan is expected to maintain
its ultra-easy monetary stance and could even take additional steps,
notwithstanding signs that it could be reaching the limits of its
power to reflate the economy.
This month, BoJ bought bills at negative yields, essentially paying
banks for the privilege of lending them cash.
"We do view the dollar as having embarked on a long-term recovery,"
said Jane Foley, senior currency analyst at Rabobank. "We maintain a
medium-term target for dollar/yen at 110 yen."
The dollar gained 0.2 percent on the day to 107.355 yen, moving back
towards a six-year peak of 107.39 set last Friday. The euro slipped
to $1.2955 after climbing to a near two-week high just shy of
$1.3000 on Tuesday.
The euro barely reacted to an upwardly revised reading for inflation
as it did little to alter expectations of further stimulus from the
European Central Bank.
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Consumer inflation rose 0.1 percent month-on-month in August for a
0.4 percent year-on-year increase, more than an initial estimate
released late in August of 0.3 percent.
The Australian dollar eased, but found support near $0.9060, helped
by media reports that China's central bank is providing 500 billion
yuan ($81.35 billion) of liquidity to the country's top five banks
through standing lending facilities.
Australia's currency is often used as a liquid proxy for China
plays, as the two countries are major trading partners.
Meanwhile, sterling rose 0.2 percent to $1.6305, a day ahead of the
Scottish referendum and staying well above a 10-month low of $1.6051
struck last week.
It has bounced from those lows after most polls showed those
intending to vote to stay in the union were slightly ahead.
Nevertheless, the vote was too close to call, leading to a jump in
overnight implied volatility, a gauge of how sharp currency swings
will be, to 18.6 percent. [GBP/]
It rose after minutes from Bank of England showed two officials
backing a rate hike. Unemployment and wages figures also came in
better than expected, adding to the case for the BoE to raise
interest rates within months.
(Editing by Catherine Evans)
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