Dollar flat before Fed meeting; investors eye outlook

LONDON - 26 September 2018: The dollar was flat on Wednesday before an expected Federal Reserve interest rate hike priced in by investors still on edge about a trade row between the United States and China.

The U.S. currency slipped against the Japanese yen, the Australian dollar and the New Zealand dollar.

The Fed is expected to raise interest rates for the eighth time since late 2015. Investors are also counting on another rate increase by the end of the year, but the outlook for 2019 is less clear.

Focus will be on the central bank’s policy outlook and any comments on the global trade dispute.

“We expect [the Fed] to signal that future hikes are warranted, but more explicitly to acknowledge the downside risks associated with trade and international financial conditions,” said Hans Redeker, global head of FX strategy.

The meeting could temporarily lift the dollar, he said, but a long-term boost was unlikely.

The dollar will take its cue from the Fed’s forward guidance and whether there are any noticeable changes in the “dot plots”, according to Fawad Razaqzada, a market analyst at FOREX.com in London. Fed officials’ median projection on the number of rate increases is commonly referred to as its dot plot.

This year began with the dollar retreating, but a hawkish rate outlook and the U.S.-China trade war have made it a safe haven for investors. In recent weeks, though, it has lost ground as other economies, such as the euro zone, improved and moved closer to tightening monetary policy.

The dollar index, which measures the U.S. currency against six major currencies, has slipped around 3 percent since mid-August. On Wednesday the index was at 94.112, near a 2 1/2-month low of 93.814 touched on Friday.

The euro, on the other hand, rose despite a European Central Bank official downplaying on Tuesday comments by ECB President Mario Draghi about “relatively vigorous” inflation.

Some analysts said the euro was also supported by signs Italy’s anti-establishment coalition is likely to reach a compromise over its 2019 budget.

The euro was last up 0.1 percent at $1.1771. It had touched a 3 1/2-month high on Monday after Draghi expressed confidence in euro zone inflation and wage growth.

Minori Uchida, MUFG Bank’s chief currency analyst, said appetite for risk has increased as the impact of U.S. tariffs on Chinese goods remains relatively small.

The United States imposed fresh tariffs of 10 percent on $200 billion worth of Chinese goods on Monday, which will rise to 25 percent at the end of 2018.

The Australian dollar tacked on 0.2 percent to $0.7272.

The New Zealand dollar advanced 0.4 percent to $0.6699 after a survey showed a surprising bounce in business sentiment in September from a decade low.

The pound was a shade lower at $1.3171, trading barely changed after rising about half a percent during the previous session.