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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.
The dollar was just over 0.1 percent down against a basket of
currencies in midday trade in Europe. The euro <EUR=> inched up
to $1.0645 and the yen rose 0.2 percent to 114.93 to the dollar.
<JPY=>
"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 pullback this week points to doubts on any push 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."Goldman Sachs strategists
called for the dollar to rise after the decision
"For us as dollar bulls, it is not whether the Fed hikes or not
at a given meeting that matters, but rather what kind of overall
hiking cycle it communicates," they said in a note.
"Given that some kind of fiscal stimulus is likely, we think
market pricing should be somewhere between two and three hikes
for next year, not between (currently priced) one and two."
(Editing by Mark Trevelyan)
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