Dollar eases as focus shifts to Fed meeting
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The dollar eased versus most of its peers on Monday as investors turned their attention to this week’s Federal Reserve policy meeting, with traders wagering policymakers will signal a pause in their tightening cycle. The Federal Open Market Committee meets between Jan 29-30, and Chairman Jerome Powell is widely expected to acknowledge growing risks to the US economy as global momentum weakens.
The dollar fell 0.2% versus the offshore yuan to 6.7406. The rally in the yuan also fuelled a bounce in the Australian dollar, which gained 0.18% versus the dollar to $0.7195. Kiwi dollar strengthened by 0.3% to $0.6859.
“The general direction for the dollar is still down and markets will be taking cues from the FOMC this week,” said Sim Moh Siong, currency strategist at Bank of Singapore.
“The Fed will most likely keep rates steady this year given the state of economic growth outside the US”
The dollar index, a gauge of its value versus six major peers was marginally lower at 95.74, after falling 0.8% on Friday.
A deal to reopen the US government for now after a prolonged shutdown also reduced investor demand for the safety of the greenback.
‘The re-opening of Federal government after one-month shutdown fuelled ‘risk on’ rally in the US equities and slashed demand for safe-haven currency like USD, leading to sharp decline of the dollar index last Friday,” said Margaret Yang, markets analyst at CMC Markets.
Over the past two months or so, Powell and several other Fed policymakers have taken a more cautious approach on further monetary tightening, leaving the dollar underpowered after it enjoyed a boost from the Fed’s four rate increases last year.
Traders are bearish on the dollar for 2019.
Amid a weakening global economy and US-Sino trade tensions, the US central bank is widely expected to hold rates steady this year to avoid hurting growth at home. Interest rate futures markets are pricing in no rate hikes for 2019.
Investors are also anxiously waiting news from high-level US-China trade talks on Tuesday and Wednesday to see if the world’s largest economies can reach a compromise that will end their trade war. President Donald Trump has threatened to hike tariffs on Chinese goods if there is no significant progress in the negotiations.
“The general direction for the dollar is still down and markets will be taking cues from the FOMC this week,”
The yen added 0.2% in early Asian trade at 109.34.
The dollar has gained around 1.2% on the yen over the last two weeks. Not helping the yen was the Bank of Japan’s downgrade of its inflation forecasts last week when it also maintained its accommodative monetary policy, as widely expected.
Moreover, Japanese investors have been net buyers of foreign bonds over the last few weeks, stoking demand for dollars. This likely explains why the safe-haven yen has not appreciated during this period even though risks of a global economic slowdown have rattled investor sentiment.
The euro was marginally higher at $1.1411.
The single currency managed to cling on to a 0.4 percent gain made last week despite the European Central Bank downgrading its growth forecasts for the near term.
Growth data out of Europe’s economic powerhouses such as Germany and France has been weaker-than-expected and analysts expect the ECB to remain dovish for an extended period.
Traders believe Europe’s slowdown and a dovish ECB are priced into the euro, which has traded in a $1.12-$1.16 range over the last three months.
Sterling was marginally lower, fetching $1.3193.
Cable gained 2.5% last week after a report in the Sun newspaper that Northern Ireland’s Democratic Unionist Party had privately decided to offer conditional backing for British Prime Minister Theresa May’s Brexit deal this week.
However, Ireland’s Deputy Prime Minister Simon Coveney said on Sunday the backstop was already a compromise drawn up to meet May’s negotiating red lines, and the EU and Ireland were united in the view it “was not going to change”.
Analyst expect sterling to remain volatile. Britain is set to leave the European Union on March 29, but the country’s members of parliament remain far from agreeing a divorce deal.
Questions & Answers
Q.Why did the dollar ease against most currencies on Monday?
Why did the dollar ease against most currencies on Monday?
The dollar eased as investors focused on the Federal Reserve's policy meeting, with traders expecting policymakers to signal a pause in their tightening cycle. The reopening of the US government also reduced demand for the greenback as a safe haven.
Q.What is the market expectation for the Federal Reserve's interest rate policy this year?
What is the market expectation for the Federal Reserve's interest rate policy this year?
The market widely expects the Federal Reserve to hold rates steady this year. Interest rate futures are pricing in no rate hikes for 2019, reflecting concerns about weakening global economic growth.
Q.Why did the safe-haven yen not appreciate recently despite global economic risks?
Why did the safe-haven yen not appreciate recently despite global economic risks?
The yen did not appreciate despite global economic slowdown risks partly because the Bank of Japan downgraded its inflation forecasts and maintained accommodative monetary policy. Japanese investors also bought foreign bonds, stoking dollar demand.
Q.What caused sterling to gain last week, and why is it currently lower?
What caused sterling to gain last week, and why is it currently lower?
Sterling gained last week after a report suggested the DUP might conditionally back Theresa May's Brexit deal. It is marginally lower now after Ireland's Deputy Prime Minister stated the backstop would not change, highlighting continued Brexit uncertainty.
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