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As
an erratic Chinese stock market stoked fears about the stability
of the world's second-largest economy, investors sought refuge
in the safe-haven Swiss franc, which hit its highest level for
almost two weeks against the euro.
The dollar has surged by almost 20 percent against a basket of
major currencies in the past year <.DXY> as expectations have
grown that the Fed will become the first major central bank to
raise rates since the financial crisis.
And although it has stalled in the past few months as mixed U.S.
data and worries over global growth have pushed back
expectations of when that hike will come, most investors now
reckon that the Fed "lift-off" will come by the end of the year,
perhaps as soon as September.
The Fed releases the minutes from its latest policy meeting at
2:00 p.m. ET, while U.S. inflation data due at 8:30 a.m. ET will
also be closely eyed.
"This is probably the most important day of the week in terms of
data and events, so there is a bit of a wait-and-see mood," said
Barclays FX strategist Hamish Pepper in London.
"The market will be most interested in where U.S. inflation
comes in, because this is something that will determine not just
when the Fed begins to normalize policy but also the pace at
which they tighten, going forward."
The Bank of England is expected to follow the Fed with a hike,
and that view was bolstered on Tuesday by higher-than-expected
core UK inflation numbers that sent sterling to a 7-1/2-year
high on a trade-weighted basis.
"The market may well look for a similar pick-up in the U.S. core
inflation as we've seen in the UK," said Morgan Stanley's head
of European FX strategy in London, Ian Stannard.
Stannard expects the euro to fall to $1.05 by the end of the
year as the European Central Bank's 1 trillion euro quantitative
easing program feeds through, but reckons that the single
currency could gain in the short term if risk sentiment remains
subdued.
The dollar was 0.1 percent lower on the day against its basket
at 96.747, while the euro traded up 0.1 percent at $1.1065 as a
diminished appetite for risk drove investors who had held
euro-funded positions in emerging market currencies to buy back
the single currency.
Against the Swiss franc, the euro was 0.4 percent lower at
1.0740 francs.
(Additional reporting by Masayuki Kitano in Singapore and Ian
Chua in Sydney; Editing by Andrew Heavens)
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