Dollar Slips Before Fed, Euro Rises on ECB Rate Hike Bets

TOKYO/LONDON—The dollar edged lower on Wednesday but hovered close to a two week high ahead of an expected U.S. Federal Reserve interest rate rise later in the day, with investors focused on Fed Chair Jerome Powell’s upcoming comments.

Traders also awaited policy decisions from the European Central Bank (ECB) and Bank of Japan (BoJ) this week.

The U.S. dollar index, which measures the currency against six major peers, edged 0.2 percent lower to 101.09, but was close to a two week high touched on Tuesday.

Money market traders see a quarter point hike from the Fed later on Wednesday as a near certainty, but are fairly equally split on the odds for another later in the year.

Esther Reichelt, FX analyst at Commerzbank said market reaction will depend on Mr. Powell’s comments.

“It is likely to be just as certain that the FX market’s reaction will not depend very much on these 25 basis points but on everything else surrounding the meeting,” she said.

Continued signs of a resilient U.S. economy in the face of the Federal Open Market Committee’s (FOMC) steep series of interest rate increases has helped lift the dollar index from a 15-month trough of 99.549 reached a week ago.

In the latest data, U.S. consumer confidence rose to a two-year high in July amid a persistently tight labour market and receding inflation.

Focus on Central Banks

Elsewhere, the ECB sets policy on Thursday. Again, a quarter point hike is widely expected, but building evidence of an economic slowdown has called into question the chances of another by year-end.

The euro rose 0.2 percent to $1.1081, after hitting a two-week low on Tuesday.

“If the ECB retain their hawkish bias, by no means guaranteed but more likely than the FOMC, euro is likely to track higher this week,” said Joseph Capurso, a strategist at Commonwealth Bank of Australia.

The BoJ sets policy on Friday, and speculation about a hawkish tweak to its yield curve control policy, which had soared earlier in the month, has receded over recent days.

The dollar was down 0.44 percent at 140.35 yen, following a rebound from a multi-week low of 137.245 mid-month.

The Australian dollar slid 0.5 percent to $0.6757 after slower-than-expected inflation data suggested the Reserve Bank of Australia (RBA) would forgo a rate hike on Aug. 1.

That unwound much of the Aussie’s 0.79 percent gain of the previous day, after Beijing announced stimulus, lifting the economic outlook for Australia’s key trading partner.

Against the Chinese yuan, the U.S. dollar strengthened 0.27 percent to 7.1565 yuan in offshore trading, retracing part of the previous day’s 0.67 percent decline.

Sterling edged 0.1 percent higher at $1.2919. The Bank of England sets rates on Aug. 3. Money markets are split between a 25 bp or a 50 bp rate hike.