Dollar eases as investors ponder outlook for Fed rates

(C) Reuters. FILE PHOTO: A picture illustration shows U.S. 100-dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar was pinned near five-week lows on Wednesday ahead of the conclusion of the U.S. Federal Reserve’s policy meeting, with investors awaiting clarity on the path the central bank is likely to take in the wake of global banking turmoil.

Investor attention is zeroed in on whether the Fed will stick to its hawkish path to fight sticky inflation or pause interest rate hikes given recent trouble among banks which has included bankruptcy and last-minute rescues.

The U.S. dollar index, which measures the currency against six peers, was at 103.19, just above the five-week low of 102.99 touched overnight. The euro was at $1.0770, hovering around a five-week high of $1.0789 scaled overnight.

Markets are now pricing in about a 15% chance of the Fed not increasing rates, with a roughly 85% chance of a 25 basis point hike, showed the CME FedWatch tool. Just a month earlier, the market was pricing in a 24% chance of a 50 basis point hike.

Investor sentiment remained fragile with worries over the outlook for the banking sector starting to ease after sharp volatility in the market in the past few weeks following high-profile U.S. banking failures earlier in the month and the rescue of lender Credit Suisse Group AG at the weekend.

“Markets are seemingly becoming more comfortable with the idea that authorities have probably done enough to prevent a systemic banking crisis,” said Rodrigo Catril, a senior currency strategist at National Australia Bank (OTC:NABZY) in Sydney.

“It might be early days, but the price action over the past 48 hours is certainly signalling a change in mood by investors.”

The Fed meeting concludes on Wednesday with the 2 p.m. EDT (1800 GMT) release of a policy statement followed half an hour later by a news conference by Chair Jerome Powell.

Catril said the Fed faces a difficult choice given a strong labour market alongside February inflation figures that were higher than many market watchers expected. Such circumstances would usually be ripe for a return to a 50 basis point hike were it not for worries over financial stability, he said.

Christopher Wong, currency strategist at OCBC, said the focus will be on how the Fed communicates its forward guidance, in particular “the higher for longer” rhetoric.

“Ideally, we would like the Fed to go with a 25 basis point hike this meeting, tone down hawkish guidance and emphasize that policy decisions at subsequent meetings will continue to be data-dependent,” Wong said. “This wishlist should see dollar trade on the softer profile and risk proxies trade steadily.”

Meanwhile, the yen strengthened 0.04% to 132.47 per dollar, whereas sterling was last trading at $1.2233, up 0.16% on the day.

The Australian dollar rose 0.36% to $0.6694, while the New Zealand dollar gained 0.11% to $0.6199.

In cryptocurrencies, bitcoin last rose 0.44% to $28,276.58, but was below a nine-month peak it touched on Monday.

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Currency bid prices at 0524 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar $1.0769 $1.0770 -0.01% +0.50% +1.0776 +1.0766

Dollar/Yen 132.4200 132.4900 -0.10% +0.86% +132.7650 +132.2650

Euro/Yen 142.61 142.67 -0.04% +1.65% +143.0300 +142.4300

Dollar/Swiss 0.9226 0.9223 +0.01% -0.24% +0.9230 +0.9215

Sterling/Dollar 1.2228 1.2219 +0.12% +1.15% +1.2236 +1.2209

Dollar/Canadian 1.3701 1.3713 -0.09% +1.11% +1.3718 +1.3700

Aussie/Dollar 0.6694 0.6671 +0.37% -1.78% +0.6696 +0.6662

NZ 0.6201 0.6194 +0.10% -2.35% +0.6204 +0.6173

Dollar/Dollar

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ