LDN - Business

Dollar holds below one-month high; currency markets quiet before Fed

[June 16, 2021] By Elizabeth Howcroft

LONDON (Reuters) -The dollar was steady on Wednesday, with currency markets generally quiet ahead of a U.S. Federal Reserve meeting, where investors will be looking for any sign of response to the jump in U.S. inflation.

The Fed concludes its policy meeting later in the day and will release new economic projections along with a policy statement at 1400 EDT (1800 GMT).

The central bank is widely expected to acknowledge the first conversations among its policymakers about when and how fast to pare back the massive bond-buying programme launched in 2020, but most investors think the Fed will refrain from any hints of starting tapering its stimulus in the near future.

At 1036 GMT, the dollar was flat on the day against a basket of currencies, at 90.529. On Tuesday, it hit a one-month high of 90.677, despite mixed U.S. economic data.

The euro was little changed against the dollar, at $1.21185.

U.S. retail sales dropped more than expected in May but sales in April were revised sharply up and are well above their pre-pandemic level.

Separate data showed that wholesale price inflation accelerated to 6.6%. Consumer price data last week showed the sharpest rise in more than a dozen years.

Market participants will be listening to the news conference after the Federal Open Market Committee (FOMC) meeting for any change in tone from Fed Chair Jerome Powell about whether the inflation is likely to be temporary or longer-lasting.

"If Powell sounds hawkish after all, the USD reaction is going to be more pronounced," said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank.

"Because the market is preparing more for large potential moves it then makes sense that EUR-USD will trade closer to 1.21 than to 1.22 until the FOMC meeting."

Ned Rumpeltin, head of European currency strategy at TD Securities, said Powell would need to choose his words carefully to avoid surprising the market about possible tapering of monetary stimulus.

"At some point in the next couple of months, the Fed's going to say 'we're talking about tapering'...it's an important signpost for the markets – the ship is turning slowly."

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A U.S. dollar note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

Rumpeltin said the Fed faces a "laborious process" of slowly letting the market know about the change in policy direction.

"Unless we get a major directional push today, I would say we’ll probably find a generally broad equilibrium in FX markets for the next couple of weeks and months."

Risk-related currencies were slightly higher, with the New Zealand dollar up 0.3% at $0.7144 and the Australian dollar - which is seen as a proxy for risk appetite - up 0.2% at $0.7703.

The pound was up 0.2% at $1.4112 after British inflation unexpectedly jumped above the Bank of England's 2% target in May.

In the oil market, Brent crude hit the highest since April 2019 due to a mix of post-pandemic demand and restricted production. [O/R]

Japan's exports rose at the fastest pace since 1980 in May and a key gauge of capital spending grew, helping the world's third largest economy offset sluggish domestic demand as COVID-19 vaccinations boost business activity in key markets.

The dollar was a touch lower versus the yen, with the pair changing hands at 109.955.

The Chinese yuan was little changed versus the dollar, hovering around the key 6.40 level, after China's industrial output and retail sales data both were below their forecasts.

Elsewhere, bitcoin was around $39,700. The cryptocurrency climbed above $40,000 earlier in the week following tweets from Tesla boss Elon Musk, who said that Tesla may resume transactions using it.

(Reporting by Elizabeth Howcroft; Editing by Alison Williams and Alex Richardson)

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