LONDON: The dollar edged higher on Tuesday, reversing some of its losses the previous day as investors positioned themselves ahead of Wednesday's policy meeting at the US Federal Reserve, which is widely expected to raise interest rates.
Though a quarter point hike -- its sixth since the Fed began raising interest rates in late 2015 -- is baked into market prices, investors are keen to hear what officials have to say on the future trajectory of rates.
Markets expect two more rate hikes after Wednesday for the remainder of the year, although analysts warn that if a majority of Fed policymakers forecast a total of four increases this year in their "dot plot" projections then the dollar could gain.
"Only a confident sounding outlook wouldn't shake the dollar out of its ranges as there seems to be more structural headwinds at play, but if we see many voices leaning towards four rate hikes, that might be a game changer in the short term," said Richard Falkenhall, senior FX strategist at SEB.
The dollar edged 0.15 percent higher against a basket of currencies to 89.91, partially reversing a 0.5 percent drop the previous day thanks to a relief rally in sterling after a transition deal was announced and the euro's bounce.
On Tuesday, the single currency was consolidating gains at $1.2339 against the dollar.
The common currency had drawn strength on Monday from a source-based Reuters report that ECB policymakers are shifting the focus of their debates.
Policymakers are comfortable with market forecasts, including for a rate hike by mid-2019, and the debate is increasingly about the steepness of the rate path thereafter, as some want future expectations contained, given the slow rebound in inflation, five sources with direct knowledge of the discussion told Reuters.
On technical charts, the dollar seems to have found strong support in the 105.00 to 105.50 yen area, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
He added that the dollar's yield advantage over the yen could also help bolster the greenback.
"Once Japan's new financial year starts (in April), Japanese institutional investors are likely to become active in foreign bond investments," Murata said, referring to the possibility they will take on foreign-exchange risk in search of better returns abroad.
Still, some traders saw limited upside potential for the dollar, with the yen seen supported by signs of a retreat in investor risk appetite.
"It's pretty easy to stay short dollar/yen in this environment given the risk aversion," said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore.
The yen is a traditional safe-haven currency that tends to attract demand in times of market turmoil.
The dollar was trading 0.26 percent higher against the yen.
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