LDN - Business

Commodity bloc rally deepens in wait for Fed

[June 14, 2017] By Patrick Graham

LONDON (Reuters) - The dollar steadied on Wednesday ahead of a Federal Reserve policy statement widely expected to raise interest rates for the third time in six months but also to signal doubts over how soon it may make its next move.

Against the euro and yen, the greenback was roughly steady but it saw solid losses for a second day against the commodity bloc of currencies, all of which have benefited from a surge in expectations of higher Canadian interest rates.

Worries about the pace of global growth and weakness in markets for the commodities they produce drove a 5 percent slide in the values of both Australia's <AUD=D4> and Canada's dollars <CAD=D4> between March and May.

But after comments by Bank of Canada Deputy Governor Carolyn Wilkins on Monday flipped markets towards an earlier rise in borrowing rates there, traders and analysts say bets against the bloc have looked exposed.

The loonie is in the middle of its best week since April of last year, up 2.5 percent since last Friday.

"There was a stale short of the commodity bloc and the move in the CAD has dragged them higher," said Stephen Gallo, head of European FX strategy with Bank of Montreal in London.

By 0743 GMT in London, the Canadian, New Zealand and Aussie dollars were all a quarter of a percent higher on the day against their U.S. counterpart at respectively C$1.3209, $0.7237 <NZD=D4> and $0.7558.

Added to another cautious recovery for sterling <GBP=D3>, that left the dollar index 0.04 percent weaker on the day at 96.936. <.DXY>

The Fed is scheduled to announce its monetary policy decision at 1800 GMT on Wednesday at the end of a two-day policy meeting, followed by a press conference by U.S. Federal Reserve Chair Janet Yellen.

A rise in rates is baked in and may give the dollar only the most minimal of boosts.

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A U.S. five dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

Any signal that the U.S. central bank is moving towards a reduction in its holdings of more than $4 trillion in Treasuries and mortgage-backed securities might have some more impact. There are also expectations of tweak in the Fed's outlook to reflect a weaker run of data since the start of the year.

"People are positioned for a dovish hike," BMO's Gallo said.

"We'll still see rate hikes baked in for the future. But there is a risk that they will send some sort of dovish signal. A median dot comes down, something like that. If Yellen says something about balance sheet reduction, that would be dollar positive."

Fed funds futures on Tuesday suggested traders saw only a 29 percent chance of rates rising to 1.25-1.50 percent at the Fed's Sept. 19-20 meeting, and a 57 percent chance of such a move at its Dec. 12-13 meeting.

"What investors want to know most is the pace of rate hikes going forward," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust in Tokyo.

"With many market participants worried about a dovish outlook, a surprisingly hawkish one could catch some investors off guard," she said. "The U.S. economy isn't doing so badly, so anything is possible."

(Additional reporting by Lisa Twaronite in Tokyo; Editing by Tom Heneghan)

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