Dollar slips ahead of Federal Reserve guidance
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By Wallace Witkowski and William L. Watts, MarketWatch
SAN FRANCISCO (MarketWatch) — The U.S. dollar continued to weaken Tuesday, as Federal Reserve policy makers started a two-day meeting that’s expected to result in a modest scaling back of the central bank’s bond-buying program.
The ICE dollar index DXY -1.09% , which tracks the greenback against six rivals, fell to 81.167, down from 81.268 late Monday in North America, while the WSJ Dollar Index XX
UXX +0.15% edged down to 73.46 from Monday’s close at 73.54.
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The dollar slips on Tuesday.
Currency markets were in a holding pattern as investors awaited the conclusion Wednesday of the two-day Federal Open Market Committee policy meeting.
“We felt that the market overreacted yesterday to the Summers news, but the dollar’s recovery today has been quite limited,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a note. The dollar fell sharply Monday after former U.S. Treasury Secretary Larry Summers removed himself from consideration to run the Federal Reserve. Summers was seen as relatively hawkish.
“We were looking for more of an upside bias ahead of the FOMC given the dollar’s recent decline,” Chandler said.
Many economists predict the central bank will announce the long-anticipated trimming, or so-called “taper,” of its monthly asset purchases by a modest amount.
Over the past few months, strength in the U.S. dollar has accumulated a “taper” premium — although not as pronounced as the one in stocks or Treasury yields — and the greenback’s been shedding some of that over the past few weeks, said John Kicklighter, chief strategist at Daily FX.com, in emailed comments.
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“The correction though has been exceptionally persistent,” Kicklighter said. “Those trading the dollar will be watching two things — the possible pace of taper beyond the first move along with an eye to the first rate hike, and the impact on risk trends.”
Analysts at Société Générale wrote: “Perhaps the biggest wild card will be the first glance at the [Fed policy makers’] forecasts for the fed funds rate in 2016.” “Our guess is that the mean forecast could be as high as 2.75%-3%, which would put it significantly above current forward rates,” they said.
The euro gained a little ground after a stronger-than-expected reading from the September ZEW index of German investor expectations. The euro EURUSD -0.12% traded at $1.3355 in recent action, up from Monday’s $1.3339, and the British pound GBPUSD -0.10% rose slightly to fetch $1.5904 versus $1.5901. Strategists were reluctant to put much weight on the ZEW reading, however, noting the index’s lackluster reputation as a gauge of economic activity.
“As usual, we would caution that the survey contains little forward-looking information and we will put much more weight on next week’s Ifo survey” of German business sentiment, said Adam Cole, head of G-10 FX strategy at Royal Bank of Canada.
The Japanese yen fell, with the dollar USDJPY +0.22% ticking up to ¥99.16 from ¥99.09.
The Australian dollar AUDUSD -0.28% rebounded after initially extending losses on the release of minutes from the latest Reserve Bank of Australia policy meeting.
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The minutes retained language showing the central bank was still open to further cutting the policy interest rate from its record low of 2.5%.
This sent the Aussie as low as 92.84 U.S. cents from 93.08 U.S. cents just ahead of the release, and off from late Monday’s 93.13 U.S. cents. The Aussie, however, fetched 93.53 U.S. cents in recent action.
TD Securities strategist Alvin Pontoh noted that the Australian dollar “has risen by 3 [U.S.] cents since the RBA last met, and unless this is reversed in the coming days and weeks, the risk is that the RBA could not only talk down the currency at its next meeting, but also re-introduce an explicit easing bias to the communiqué.” However, Pontoh said TD Securities remained “comfortable forecasting no further rate cuts in the profile.”
The RBA’s next policy decision is due Oct. 1.
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