By Tom Westbrook
SINGAPORE (Reuters) – The dollar fell on Wednesday while the yen recovered some losses as investors made last-minute changes to their positions ahead of a meeting that is set to kick off a U.S. monetary policy easing cycle.
The Federal Reserve is expected to deliver its first interest rate cut in more than four years at 1800 GMT, with markets pricing a two-thirds chance of a 50 basis point cut.
Since July, the dollar has been losing value along with US bond yields and is just above a one-year low of $1.1119 to the euro at $1.1201. All this is in anticipation of a significant easing of monetary policy in the US, with interest rate cuts of more than 100 basis points priced in by Christmas.
The yen, which has gained more than 12% since July, is strengthening as the Bank of Japan, which sets monetary policy on Friday, raises interest rates at the same time as the Federal Reserve prepares to cut them.
It rose about 0.7% to 141.41 per dollar on Wednesday, recovering some of an overnight loss. The yen rose 0.6% to 157.24 per euro.
Elsewhere, the Australian dollar briefly hit a two-week high at $0.6773, while a rise in milk prices supported the New Zealand dollar at $0.6196, although moves were choppy ahead of the Federal Reserve meeting. [AUD/]
Traders say the tone of the Federal Reserve’s decision and the scale of the interest rate cut will determine the reaction in the currency market.
“The Federal Reserve’s dovish stance and significant easing should generally lead to a weaker dollar,” said Nathan Swami, head of currency trading at Citi in Singapore.
However, Swami said, the Fed’s unusually dovish stance could spook markets if it turns out that it is predicting a more severe economic downturn than expected, in which case risk-sensitive and emerging-market currencies could face headwinds.
U.S. retail sales unexpectedly rose 0.1% in August, overnight data showed, compared with forecasts for a 0.2% decline. Additionally, the Atlanta Federal Reserve’s closely watched GDPNow estimate was raised to 3% from 2.5%, perhaps supporting a smaller rate cut from the Federal Reserve.
China markets resumed trading Wednesday after a break for the Mid-Autumn Festival, with the yuan’s trading range set at its strongest level since January. The currency was steady at 7.0969 per dollar. [CNY/]
Sterling, the best-performing G10 currency this year, held steady at $1.3158, boosted by signs of a stabilizing economy and sticky inflation. British inflation data is due later in the day, while the Bank of England is expected to leave interest rates at 5% on Thursday, with a 35% chance of a cut.
Final inflation data for Europe will also be released, but it is not expected to differ significantly from the preliminary data released in August, so all eyes will be on the Fed.
“With markets betting on a 41bp cut, which is far from the realistic chances (25 or 50bp), volatility seems almost certain,” ANZ Bank analysts said in a note to clients.
