LONDON: The euro hovered near two-week lows against the dollar on Wednesday as investors waited to see if the US Federal Reserve would follow the lead of the European Central Bank and sound as dovish on future interest rate cuts and stimulus.
ECB President Mario Draghi's about-face on easing on Tuesday fuelled talk of a worldwide wave of central bank stimulus, firing up stocks, bonds and commodities, although currency moves were smaller.
The Fed is scheduled to release its monetary policy statement at 1800 GMT, followed by a press conference by Chairman Jerome Powell shortly after. Futures are almost fully priced for a quarter-point easing in July and imply more than 60 basis points of cuts by Christmas.
The euro was unchanged at $1.1195 in early London trading, having fallen to a two-week low of $1.1181 on Tuesday after Draghi struck a dovish tone. The common currency dropped along with a decline in German government bond yields, which hit a new record low.
The dollar, measured against a basket of rival currencies, was flat at 97.621 after it hit a two-week high on Tuesday.
The greenback had been under pressure in late May as investors began to bet on Fed rate cuts in the face of global trade tensions and some signs of economic weakness, but expectations other central banks such as the ECB will follow suit have since helped the dollar recover.
"Relative to what the market is priced for, it's hard to see how they (the Fed) will surprise the market on the dovish side. The risks are the other way," said Adam Cole, a currencies strategist at RBC Capital Markets.
Cole said he believed the market was "underplaying" the significance of the outright spread between Europe and the United States, and even if the Fed cuts, investors will still be paying to hold euros while earning a relatively good yield with dollars.
That should support the dollar, with Cole predicting a euro low of $1.10 this year.
US President Donald Trump said on Tuesday he would have an extended meeting with Chinese President Xi Jinping at the Group of 20 leaders summit later this month, raising investors' hopes that they can ease tensions in a trade dispute that has damaged the world economy.
"If a meeting between Trump and Xi goes well, sentiment will improve, which will be supportive for dollar/yen," said Tohru Sasaki, head of Japan markets research at JP Morgan Securities.
The yen was up 0.2pc at 108.28 yen per dollar, suggesting investors remained cautious.
China's yuan pulled back from a three-week high hit on Tuesday following news Xi and Trump would meet. The offshore yuan last traded at 6.9062, down 0.1pc on the day.
Sterling was little moved by Boris Johnson's confirmation as the frontrunner in the Conservative Party leadership contest. It was last down 0.1pc at $1.2547.
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