LDN - Business

Dollar near five-month highs ahead of Fed policy decision

[May 01, 2024] By Alun John

LONDON (Reuters) - The dollar edged towards its highest level this year against a basket of peers and U.S. share futures dipped on Wednesday ahead of a Federal Reserve policy decision, though trading was thin with many European and Asian markets closed.

The dollar gained over 0.5% on Tuesday on all six currencies that make up the dollar index, leaving the gauge at 106.49, a whisker off its highest since November.

The euro was under pressure at $1.0664, heading back to its mid April five-month lows, while the pound was at $1.2488.

The latest move higher in the dollar came with after hotter-than-expected first-quarter U.S. employment cost growth on Tuesday, which sent Treasury yields higher and caused markets to further pare bets on Fed rate cuts this year.

Traders are currently only pricing in one rate cut in 2024.

The Fed is almost certain to hold its benchmark overnight interest rate steady later in the day, but a policy statement issued at 2 p.m. EDT (1800 GMT) and Chair Jerome Powell's press conference half an hour later should provide insight into how deeply – if at all – a stretch of three lost months in the inflation battle has affected the likelihood that borrowing costs will fall any time soon.

"It's pretty clear from the way that the data has been that we're going to see a focus shift from the last Fed meeting, the question is the extent to which Powell has already previewed the shift of rhetoric when he last spoke," said Michael Sneyd, head of cross-asset and macro quantitative strategy, BNP Paribas.

The Fed chair said in mid-April that monetary policy needs to be restrictive for longer.

"Heading into the Fed, we see that from a short-term perspective the dollar is not looking cheap anywhere," said Sneyd.

"Positioning-wise we're seeing the dollar looking well-owned, valuation-wise we see the dollar is either in line with a stronger dollar fair value or slightly rich, and so that demonstrates the market is preempting this more hawkish shift, and, if anything, opens up scope for disappointment."

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Flags fly over the Federal Reserve building on a windy day in Washington, U.S., May 26, 2017. REUTERS/Kevin Lamarque/File Photo

The benchmark 10-year Treasury yield was flat on the day at 4.690%, just shy of mid-April's 4.739% its highest in five months, having jumped 7 bps the day before.

European bond markets were closed for the May 1 holiday as were most share markets in Europe and those in China, Hong Kong and much of Asia. U.S. S&P500 futures dipped 0.2%.

Of those share markets that were trading, Britain's FTSE edged up a touch, holding near its latest all-time intraday high hit the day before and Japan's Nikkei dipped 0.3%.

The British blue-chip index, which has underperformed world peers in recent months, was a rare gainer in April, rising 2.4% helped by commodities stocks, while MSCI's world index dropped 3.4%, its biggest monthly fall since September.

The other focus in currency markets is the Japanese yen. The currency dropped to 160 per dollar on Monday, its lowest since 1990, before strengthening in several sharp bursts to as strong as 154.4 per dollar with traders pointing to likely official intervention.

Japanese officials may have spent some 5.5 trillion yen($35.05 billion) in supporting the currency on Monday, Bank of Japan data suggested on Tuesday, but the yen was last at 157.9, over half way back to its pre-intervention level.

Oil prices fell for a third day on Wednesday amid increasing hopes of a ceasefire agreement in the Middle East and rising crude inventories and production in the U.S., the world's biggest oil consumer.

Brent was down 1% at $85.40 a barrel. U.S. crude was down 1.3% at $80.90.

Gold was flat at $2284.4 an ounce down 6% from its mid-April record high, also affected by easing tensions in the Middle East.

(Editing by Kim Coghill)

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