Dollar stands firm with Fed decision in focus

[July 28, 2021]  By Tom Wilson

LONDON (Reuters) - The dollar stood firm on Wednesday after being pinned down earlier, with investors holding off on placing major bets ahead of the outcome of a U.S. Federal Reserve meeting.

 A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

The U.S. dollar index moved into positive territory after trading lower in Asian hours. The greenback was last up a sliver at 92.474.

The Japanese yen, Swiss franc and the euro held onto the previous day's gains in Asian trading hours, with the safe-haven yen trading at 109.93 per dollar and the euro at $1.1812.

The dollar has enjoyed a month-long rally after a hawkish shift from the Fed in June. Markets are waiting to see whether it will provide any clues on the timing of tapering later in the day amid surging U.S. inflation.

The Fed publishes a statement at 1800 GMT followed by a news conference from Chair Jerome Powell at 1830 GMT.

Still, foreign exchange analysts said the chances were high that the Fed would not shift policy, given its view that the recent spike in inflation will likely be transitory and worries that growing COVID-19 cases could derail the global recovery.

"We go into the meeting with positive dollar bias," said Adam Cole, chief currency strategist at RBC Capital Markets.

"The hurdle is quite low for the Fed to be perceived to be erring on the hawkish side, and that's my bias going in."

Declining U.S. bond yields, fuelled by concerns about high inflation and the economic outlook, also cast a shadow over the dollar earlier. The 10-year inflation-linked bond yield hit a record low overnight. [US/]

YUAN CONTAGION?

The Chinese yuan pulled away from three-month lows hit on Tuesday, when it saw its biggest daily losses since October, after the country's stock market stabilised following a bruising couple of days.

The yuan's bounce was modest, however, and the risk-sensitive Australian and New Zealand dollars were both subdued as sentiment remained fragile. [AUD/]

"The Chinese currency has seen some contagious effects," of the market turbulence, Commerzbank analysts wrote in a note. "All these point to a panic mood in the market and Beijing's new policy approach seems to be tough and long-lived."

The Aussie was last down 0.2% at $0.7344, not far from last week's eight-month low of $0.7289.

Elsewhere, the British pound traded close to its highest in 13 days and was steady against the euro, with analysts attributing its gains to COVID-19 cases in Britain declining over the last seven days.

(Reporting by Tom Wilson in London; Additional Reporting by Tom Westbrook in Singapore; Editing by Ana Nicolaci da Costa and Catherine Evans)

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