Dollar stands tall as Fed heads toward taper
The dollar held within striking distance of the year’s peaks on the euro and yen on Wednesday, as investors looked for the Federal Reserve to begin unwinding pandemic-era policy support faster than central banks in Europe and Japan.
Moves were slight in Asia ahead of the Fed’s meeting later in the day and the dollar bought 113.94 yen , against a 2021 peak of 114.69, and traded at $1.1578 per euro against the year’s top of $1.1522 per euro. The U.S. dollar index held overnight gains to sit at 94.117.
But traders are focused on clues around what that means for timing of rate rises, after a month of seismic moves in the bond market in anticipation of hikes as soon as next year.
The Aussie had dropped 1.2% against the dollar on Tuesday and sat at $0.7430 on Wednesday. The kiwi was also dragged 1% lower, but found support on Wednesday from strong labour data and hovered at $0.7123.
“Fed Policy is under challenge in ways that cannot be remembered since the early Volcker years,” said Deutsche Bank strategist Alan Ruskin.
So far, the dollar had been held back by rising expectations of even faster hiking elsewhere in the world, but risks lie ahead if traders start to think that more than a few rate rises will be needed to tame fast-rising prices.
Also ahead this week is a Bank of England meeting where swaps pricing points to a modest rate hike, but a falling currency suggests a risk of disappointment or at least of a fairly stern pushback against market inflation expectations.
“However, because this is basically baked into the price, I would say the risk is for sterling to weaken if they decided rather to hold and we see some dovish repricing in money markets.”
Besides the Fed meeting, eurozone unemployment data is due later on Wednesday and several European Central Bank officials make public appearances, with French central bank head Francois Villeroy de Galhau the most notable at 1300 GMT.