LDN - Business

Dollar edges before Fed meeting, euro slips

[January 27, 2021] By Ritvik Carvalho

LONDON (Reuters) - The dollar edged higher against a basket of currencies on Wednesday as markets waited for comments from Federal Reserve Chair Jerome Powell, who is likely to renew a commitment to ultra-easy policy.

The dollar reversed declines against riskier currencies, even as pandemic recovery hopes got a boost from the International Monetary Fund's upgrading its forecast for 2021 global growth.

Treasury yields, whose rise had supported the dollar at the start of this year, declined overnight amid caution about the eventual size of and delays to President Joe Biden's $1.9 trillion fiscal stimulus plan.

"While the Fed had been consistent for the past few months that the balance of risks was still to the downside, we could see a more neutral stance being taken," said John Velis, FX and macro strategist at BNY Mellon.

"This would be seen as a marginally hawkish turn on the Committee, but we think that the Chair will make it quite clear that neither interest rate rises nor any quantified timeline for tapering bond purchases is under consideration."

The Fed chair is due to speak at a news conference after the central bank's two-day policy meeting, which ends Wednesday.

Earlier this month, he said in a web symposium with Princeton University that the U.S. economy is still far from the Fed's inflation and employment goals, and it is too early to discuss altering monthly bond purchases.

The dollar index ticked up 0.1% to 90.284 on Wednesday in Europe, following a 0.2% decline the previous session.

The gauge has been consolidating since bouncing off a nearly three-year low of 89.206 at the start of the month.

The British pound climbed to its highest since April 2018 at $1.3753 before trading slightly lower at $1.3724. [GBP/]

The Aussie dollar slipped 0.2% to 77.30 U.S. cents, paring Tuesday's 0.5% rally.

[to top of second column]

A trader shows U.S. dollar notes at a currency exchange booth in Peshawar, Pakistan December 3, 2018. REUTERS/Fayaz Aziz

EURO/DOLLAR = ECB/FED ?

The euro dipped 0.1% to $1.2146.

Analysts said reports on Tuesday the European Central Bank was studying whether differences with the Fed's policy are boosting the euro - part of a wider review of financing conditions - would not have a material effect on the currency.

It's "probably one of those headlines where it's a buy on the dip moment in euro/dollar here," said Jordan Rochester, FX strategist at Nomura in a note to clients. He remained long the euro/dollar spot rate, Rochester said, with a target of $1.25 by the end of March.

ECB President Christine Lagarde has repeatedly said the central bank is carefully monitoring the single currency's exchange rate.

"We suspect they might find that higher inflation is more credible in the US and that euro/dollar spot is closer related to the global manufacturing sector (which is doing well), not European services and maybe, that expectations are elevated in terms of Europe's comeback," said Lars Sparresø Merklin, senior analyst at Danske Bank.

"Either way, this adds to a growing number of countries who appear uncomfortable with USD weakness."

(Reporting by Ritvik Carvalho; editing by Larry King)

Back to top