Dollar on tenterhooks as investors await Fed policy clues

TOKYO: The dollar eased on Wednesday with investors looking past an expected U.S. rate hike later in the day for clues on Federal Reserve policy for the rest of the year.

The dollar index, which tracks the greenback against a basket of six major rivals, edged down 0.1 percent to 96.930 .

Against the yen, the dollar inched 0.1 percent lower to 109.98, while the euro added 0.1 percent to $1.1217 .

The Fed is scheduled to announce its monetary policy decision at 2 p.m. eastern time (1800 GMT) on Wednesday at the end of a two-day policy meeting, followed by a press conference by U.S. Federal Reserve Chair Janet Yellen.

The Fed may also provide more clues on how it plans to reduce its holdings of more than $4 trillion in Treasuries and mortgage-backed securities.

Economists polled by Reuters overwhelmingly see the U.S. central bank hiking its benchmark rate to a target range of 1.00 to 1.25 percent this week, though expectations for further rate increases are fading.

What emerges from the Fed meeting "is certainly going to chart the course for a lot, including the strength of the dollar," said Bill Northey, chief investment officer at the private client group of U.S. Bank in Helena, Montana, who spoke from Minneapolis.

"There is some risk that we could see a more dovish outlook," he said.

Fed funds futures on Tuesday suggested traders saw about a 29 percent chance of rates rising to 1.25-1.50 percent at the Fed's Sept. 19-20 meeting, and a 57 percent chance of such a move at its Dec. 12-13 meeting .

"What investors want to know most is the pace of rate hikes going forward," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust in Tokyo.

"With many market participants worried about a dovish outlook, a surprisingly hawkish one could catch some investors off guard," she said. "The U.S. economy isn't doing so badly, so anything is possible."

Traders and analysts appear divided over whether China's central bank will once again follow the Fed and raise its short-term rates, as it did in March.

Depreciation pressure on the yuan has abated, for now, after authorities engineered sharp gains in May and changed the calculation for the daily midpoint to flush out short sellers.

The Bank of Japan, which is also meeting this week, is expected to keep its monetary policy unchanged.

The New Zealand dollar slipped 0.1 percent to $0.7215  after touching a low of $0.7197, moving away from the previous session's nearly four-month high of $0.7228.

New Zealand's current account deficit as a proportion of gross domestic product widened in the March quarter to its most in a year, data out on Wednesday showed.

The dollar resumed its drop against its Canadian counterpart after skidding to its lowest levels since late February in the wake of hawkish comments from Bank of Canada Governor Stephen Poloz, who signalled that the BOC could raise interest rates sooner than previously thought.

The U.S. dollar slipped 0.1 percent to C$1.3221 after falling as far as C$1.3209 overnight, its lowest since Feb. 28.