Dollar drifts as Fed meeting

The dollar was little changed against the euro and the yen on Monday after world energy powers were unable to come up with a quick fix to rein in runaway oil prices at an emergency meeting over the weekend. Although Saudi Arabia, the host of the meeting, vowed to pump more oil, traders said the meeting resulted in no remedies that would reverse the more than $40 surge in crude since the start of the year to record peaks.
Underscoring such views, US crude oil futures rose more than $1 a barrel on Monday due to growing tension between Iran and Israel. Such a rise in oil prices bodes ill for the dollar, said a trader for a major Japanese trading house. "The United States is in a dilemma, facing both the risks of inflation and an economic slowdown, so the moves in oil prices are likely to make their impact felt," the trader said.
Market players had been eyeing the weekend meeting closely because the dollar's slide has contributed to the surge in oil prices and global inflation pressures while also adding to the US economy's housing-led struggles.
In addition, the dollar has tended to fall when oil prices surge due to speculation that oil-producing countries may use the increased dollar-denominated windfall from crude exports to buy euros and other currencies to diversify their portfolios. The dollar was steady from late US trading on Friday at 107.35 yen, staying below a four-month high of 108.59 yen hit last week.
The euro was little changed at $1.5612, but underpinned by expectations that the European Central Bank will raise interest rates by a quarter-percentage point to 4.25 percent in July.
The euro rose 0.1 percent to 167.59 yen, staying within sight of an 11-month high of 168.13 yen struck on trading platform EBS on Friday. Activity was subdued in Asian trade as investors braced for a Federal Reserve meeting this week and European economic data later in the day that will test expectations for higher interest rates on both sides of the Atlantic.
Investors will look to euro zone data, including the German Ifo institute's business climate index and euro area manufacturing sector purchasing managers index, due later in the day for clues on whether the European economy is solid enough for the ECB to boost interest rates beyond July.
The Fed wraps up a two-day policy meeting on Wednesday and is widely expected to leave rates unchanged at 2 percent, so the focal point will be the post-meeting statement for clues on whether the central bank can lift rates later in the year.
The Fed is in a tough spot as central bankers fret about mounting inflationary pressure even as the economy is suffering from fallout from the slumping housing market and credit crunch. US rate futures show that traders see the Fed raising rates by 50 basis points by year-end.
"Given market expectations for two rate rises before year-end, there is a greater risk of the dollar falling if the Fed shows a cautious stance towards rate tightening," said Junya Tanase, a forex strategist at J.P. Morgan Chase Bank in Tokyo. The dollar fell broadly late last week as fears of further write-downs in the US financial sector raised speculation the Fed would not signal a shift towards tighter monetary policy this week.