It was all about the Federal Reserve for the dollar on Wednesday, as it struggled to shake off expectations policy makers would slow the pace of US monetary tightening after their keenly-watched meeting later in the day.
The safe-haven yen and the Swiss franc held a firm tone as an overnight plunge in oil prices provided another stark reminder of the dimming prospects for the global economy, and underscored why traders expect the Fed will likely be done after an expected rate hike this week.
"The positioning going into the FOMC meeting is very defensive and that's why we are seeing the dollar weakening," said Michael McCarthy, chief markets strategist at CMC Markets.
The yen and the Swiss franc each added a little more than 0.1 percent on the dollar, changing hands at 112.33 and 0.9916 respectively, building on three consecutive days of gains.
Risk sentiment has been soured by weaker-than-expected economic data out of China and the eurozone, while the Sino-US trade dispute and a collapse in oil prices have added to fears the global economy is fast losing momentum.
In Asia, markets are looking to China's three day Central Economic Working Conference (CEWC) meeting that starts on Wednesday for Beijing's growth and reform objectives. A steady downturn in China's economy this year has been one of the key drivers of asset markets, including currencies, over the past several months.
The dollar index was down 0.25 percent at 96.86, hovering near a one-week low as it extended losses into the second day. The Fed speculation and global growth anxiety have sent US bond yields down and put further pressure on the dollar - the US 10-year treasury yield has dropped about 10 basis points in the last three days.
Elsewhere, the euro gained 0.2 percent at $1.1380, enjoying a rare uptick in the past three sessions as the dollar grappled with lower yields and monetary policy risks.
The same reasons gave the Australian and New Zealand dollars a lift, gaining 0.2 percent each to $0.7195 and $0.6864, respectively.
Nervous anticipation was palpable in global markets as they awaited the Fed's decision later in the day, especially as they look to its policy guidance for 2019 after what is expected to be its fourth rate hike for this year.
According to the CME Group's FedWatch tool, the probability of a December rate hike is 69 percent, down from around 75 percent last week, a significant move in such a short period.
While the US central bank's latest median dot plot projections from September indicated three more hikes in 2019, the rate futures market is pricing in only one more rate hike for 2019 - a shift that underscored growing signs of stress on the global economy that many believe will eventually crimp US growth.
Comments by Fed Chairman Jerome Powell in late November that the key interest rate was "just below" neutral, a level that neither brakes nor boosts the economy, have bolstered investor expectations that US central bank is nearing a pause on its monetary tightening.
However, some analysts still see the Fed raising rates 2-3 times in 2019.
"We think the Fed would raise rates twice in 2019. The Fed's reaction function
will be very data dependent next year ," said Stephen Innes, head of trading, APAC at Oanda.
Yet there were enough reasons for dollar bulls to stay cautious.
In an editorial published on Tuesday, the Wall Street Journal opined that it would be prudent for the Fed to pause on Wednesday. Moreover, US President Donald Trump kept up the pressure on the Fed, taking yet another jab in a tweet saying 'I hope the people over at the Fed will read today's Wall Street Journal Editorial before they make yet another mistake.'
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