NEW YORK: The dollar edged up against the euro on Wednesday ahead of the conclusion of a Federal Reserve policy meeting that could offer some insight into when the US central bank will begin lowering interest rates.
The main market focus will be on Fed officials’ updated economic and interest rate projections, with the US central bank expected to leave rates unchanged for the third consecutive meeting.
“The question is when the Fed cuts and why,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “The first few Fed cuts I think might just be attributed to trying to preserve the restrictiveness in the face of falling inflation.”
If the Fed holds rates steady as inflation eases the gap between the two rates, known as the real interest rate, this can make monetary conditions more restrictive than policymakers intend.
That said, investors will also be watching to see if Fed Chair Jerome Powell dims the prospect of a rate cut early in the year. Traders are pricing in a 49% chance of a cut in March and a 79% probability in May, according to CME Group’s FedWatch Tool.
The Fed will likely try to push the message that “policy is sufficiently restrictive, but no, we probably aren’t going to be able to cut rates in Q1,” Chandler said.
The US dollar index, which gauges the performance of the currency against six others, was last up 0.13% on the day at 103.88.
The Fed has insisted that it is data-dependent, but the market “is already acting like rate cuts are baked in”, said James Kniveton, senior corporate FX dealer at Convera.
“If the Fed does push back tonight on those rate cut expectations, the dollar index may have an opportunity move back into the October range of 105-107,” he said.
The dollar briefly dipped after data on Wednesday showed that US producer prices were unexpectedly unchanged in November as a decline in the cost of energy products more than offset higher food prices.
It comes after US consumer prices on Tuesday unexpectedly rose in November as a decline in the cost of gasoline was more than offset by increases in rents.
The European Central Bank, the Bank of England, the Norges Bank and Swiss National Bank are also due to meet on Thursday. The Norwegian central bank is considered to be the only one that could potentially raise rates. There is also a risk the SNB could dial back its support for the franc in currency markets.
The euro dipped 0.06% to $1.0788. Sterling fell 0.44% to $1.2508 after data showed the British economy contracted in October, raising the risk of a recession and potentially complicating the efforts of the Bank of England (BoE) to stick to its anti-inflation stance against cutting rates when it meets on Thursday.
The dollar dipped 0.07% to 145.35 Japanese yen.
The Bank of Japan meets next week, and the yen has been volatile on speculation that the BOJ is drawing close to ending its negative rate policy. Rising hopes this may occur next Tuesday were dashed after Bloomberg reported this week that BOJ officials see little need to rush to the exit.
In cryptocurrencies, bitcoin gained 0.95% to $41,850, having retreated from Friday’s 20-month high at $44,729.
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