The dollar struggled to gain traction on Wednesday as markets awaited clues on interest rate policy from the Federal Reserve, while the Australian dollar rose after one measure of domestic inflation was slightly higher than expected. The dollar index last stood at 99.041, nursing a 0.3 percent loss recorded on Tuesday and staying well below a seven-week high of 99.799 set last Thursday.
Wednesday's main focus will be on the statement released by the Fed after its January 26-27 policy review. While the central bank is almost certain to keep interest rates unchanged, investors are keen to see its latest economic outlook given the turbulent start to global financial markets this year. "If the statement refers to falls in oil prices and turmoil in financial markets or points to their impact on the outlook for inflation and growth, that could be seen as being dovish and lead to selling pressure against the dollar," Masafumi Yamamoto, chief FX strategist at Mizuho Securities in Tokyo, said in a research note.
The downside for the dollar against the yen could be limited even in such a case, however, if such a dovish-sounding Fed statement helps alleviate risk aversion and gives a lift to US equities, Yamamoto added. The dollar slipped 0.2 percent against the yen to 118.19 yen, staying within its 118.85 yen to 117.65 yen seen so far this week. Yet, with Fed fund futures implying just one rate hike this year, the risk is that anything the Fed says may be interpreted as hawkish. That could see the greenback bounce back, some traders said.
More central bank policy decisions are coming up this week, with the Reserve Bank of New Zealand (RBNZ) announcing its decision on Thursday and the Bank of Japan's (BoJ) policy statement due on Friday. The euro eased 0.1 percent to $1.0862, remaining well within this month's $1.0711-$1.0985 range. The Australian dollar edged higher after one measure of inflation came in slightly above forecasts, even as restrained price pressures overall suggested there was room for further cuts in interest rates.
While measures of underlying inflation slowed to the floor of the Australian central bank's target range, speculators had been positioned for a weaker number. The Australian dollar rose 0.2 percent to $0.7020, having risen to as high as $0.7042 after the inflation data. "Underlying inflation this low is usually a recipe for an RBA cash rate cut. But not this time: or at least not yet," Paul Bloxham, chief economist for Australia and New Zealand at HSBC, said in a research note.
"While the labour market and activity surveys are still holding up, the RBA is unlikely to cut rates. This pretty much rules out a cut next week," he said. If there is some pullback from the strong pace of jobs growth or the high level of business conditions along with a continued cooling of the Sydney and Melbourne housing markets, that may be enough to convince the RBA that another rate cut may be needed, Bloxham added.
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