LDN - Business

Dollar steady, currency markets quiet as investors wait for Fed

[December 15, 2021] By Elizabeth Howcroft

LONDON (Reuters) -The U.S. dollar held firm on Wednesday, with currency markets quiet as investors waited to see if the U.S. Federal Reserve would reinforce market expectations for rate hikes next year.

The Fed's policy statement and economic projections are due at 1900 GMT.

Markets have been pricing for the Fed to end its bond-buying around March and then proceed with one or maybe two rate hikes in 2022. Any more than two rate hikes pencilled in for next year would be considered a hawkish surprise.

The Fed meeting comes as the rapid spread of the Omicron variant of COVID-19 has spurred concern that the economic recovery will be derailed. Preliminary evidence indicates that COVID-19 vaccines may be less effective against infection and transmission linked to Omicron, the World Health Organization said.

But the expectation of Fed hawkishness has kept the dollar strong in recent weeks - it has seen little movement since it hit 96.938 last month, its highest since July 2020.

"We can’t recall going into an FOMC meeting with the consensus so strongly favouring a hawkish outcome," wrote MUFG head of research Derek Halpenny in a note to clients.

"(Fed Chairman Jerome) Powell may emphasise the uncertainty of the guidance to such an extent this evening that it dampens the response... The scope for a big move for the US dollar this evening may be limited."

Neil Jones, head of FX sales at Mizuho, said he expected the Fed to be more dovish than the market is pricing, leading to a dip in the dollar.

“It will be interesting today to see if (the Omicron variant) has had a less hawkish impact on the Fed which cannot be ruled out," he said.

"The chances of that occurring are probably higher than market expectations right now – it could be a more dovish tone from them than is currently factored in."

The dollar's moves were muted as investors waited for the meeting. It held firm in the Asian session, then slipped slightly as European markets opened, down less than 0.1% on the day at 96.517.

[to top of second column]

A U.S. one dollar banknote is seen in this illustration taken November 23, 2021. REUTERS/Murad Sezer/Illustration

Versus the Japanese yen, the dollar was up 0.2% at 113.815.

Elsa Lignos, global head of FX strategy at RBC Capital Markets, wrote in a client note that if the Fed did not emphasise the gap between ending asset purchases and raising rates, or if markets repriced to expect a higher terminal rate, then that would be a positive surprise for the dollar.

Currency markets were little affected overnight by mixed economic data from China, which showed that factory output grew faster than expected but retail sales missed forecasts.

The euro was up 0.1% at $1.1265 ahead of a European Central Bank meeting on Thursday, where officials are expected to confirm that the bank's pandemic bond-buying programme will end next March.

Britain's pound briefly rose against the dollar after data showing that UK inflation jumped to its highest in more than 10 years in November.

At 1142 GMT, it was up 0.2% on the day at $1.32505.

The Bank of England is expected to keep rates unchanged when it meets on Thursday, due to the spread of the Omicron variant in Britain.

The Australian dollar was up 0.3% at $0.7125. The New Zealand dollar was down 0.1% at $0.6735.

Meanwhile, the cryptocurrency bitcoin was down 0.3% on the day at $48,242.23 - a far cry from its latest all-time high of $69,000 which was reached in early November.

U.S. retail sales are also due later in the session.

(Reporting by Elizabeth HowcroftEditing by Gareth Jones and Bernadette Baum)

[© 2021 Thomson Reuters. All rights reserved.]

Back to top