The dollar sat on steep losses on Wednesday, after tumbling sharply against the euro and other majors, as the market got set for the Federal Reserve to dampen expectations for higher interest rates. Policy makers at the Fed began their two-day meeting on Tuesday and many expect they will want to play down expectations of higher interest rates that have built in the market, for fear these will choke an economic recovery.
Currencies such as the Australian dollar, which have been favoured as recovery plays against the dollar and yen, leapt 1 percent or more on Tuesday as the greenback lost favour. The euro also jumped 1.5 percent, helped by comments from a European Central Bank policy maker that he saw no need for more policy measures at the moment to get the economy back in shape.
"The markets are adjusting themselves ahead of the FOMC, about their over-expectations for Fed tightening, and are gradually coming back to reality," said Masafumi Yamamoto, head of FX strategy Japan at Royal Bank of Scotland. The euro held firm at $1.4099, after jumping to $1.4109 the previous day, its highest since June 12, although it was still below its 2009 peak of $1.4339. It gained 0.6 percent to 134.82 yen after rising nearly 1 percent on Tuesday.
The Australian dollar edged up 0.3 percent to $0.7962 and 0.6 percent to 76.18 yen. The Aussie has risen 26 percent against the dollar since its rally started in the first quarter and 37 percent against the yen, although it has backed off its rally highs as investor confidence has faltered on nervousness that gains have got ahead of an actual economic recovery.
"The market is likely to go back to a 'recovery trade' after some adjustments. Still, I expect the corrective phase to last a while," said Tohru Sasaki, chief FX strategist at J.P Morgan Chase Bank in Tokyo.
The Fed will also be under scrutiny for what it says about its asset buying programme aimed at keeping longer-term interest rates down. Investors want to know if it will keep and extend the programme, which includes buying US Treasuries, or whether it will even want to start winding the measures down.
"The statement is expected by the market to reaffirm a commitment to low rates, signal emergency lending is already tapering off but also signal that the Fed is unlikely to stop its asset purchases cold turkey," UBS analysts said in a client note. The dollar gained on the yen, climbing 0.4 percent to 95.62 yen after shedding 0.7 percent on Tuesday, although it remains well within a 94-100 yen range of the past two months.
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