Dollar edges up as currency markets wait for Fed meeting

LONDON (Reuters) – A cautious tone dominated currency markets on Tuesday, before the start of the U.S. Federal Reserve’s two-day monetary policy meeting.

FILE PHOTO: U.S. one dollar banknotes are seen in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration

The Fed’s policymakers are expected to forecast that the U.S. economy will grow in 2021 at its fastest rate in decades, with unemployment falling and inflation rising, but are not considered likely to change their monetary policy.

The dollar index held steady overnight then rose as European markets opened, up 0.1% on the day at 91.946 at 0804 GMT.

“Overall, the economic situation is improving further. What is decisive for the market is how the central banks react to this,” You-Na Park-Heger, FX and EM analyst at Commerzbank, wrote in a note to clients.

“The Fed is likely to try once again to dampen expectations of a reversal in US monetary policy. We will have to wait and see to what extent it will be able to convince the market though,” she said, adding that euro-dollar is likely to remain at current levels until the outcome of the meeting is known.

The firmer tone for the dollar came as U.S. Treasury yields edged up, although they remained below recent peaks.

Investors will pore over whatever the Fed has to say about the rise in yields, which have gained on bets that economic growth and inflation could prompt a faster-than-expected normalisation of monetary policy.

“Anything less than a strong message of the Fed being very committed to maintaining favourable financial market conditions will likely see USD advance further,” wrote MUFG FX strategists in a weekly note on Friday.

The euro was at $1.19185, down around 0.1% on the day.

It has held below $1.20 since March 5, hurt by expectations for a slower economic recovery in Europe compared with the UK and U.S. due to problems rolling out coronavirus vaccines.

Germany, France and Italy said on Monday they would suspend AstraZeneca COVID-19 shots after several countries reported possible serious side-effects, but the World Health Organization said there was no proven link and people should not panic.

The Australian dollar – which is seen as a liquid proxy for risk – was down 0.4% at 0.77225 versus the stronger U.S. dollar <AUD=D3. The New Zealand dollar was down around 0.3%.

Britain’s pound was down around half a percent at $1.3835. Economic growth in the UK will fall by 4% in the first quarter of 2021 compared with the first quarter of 2020, the governor of the Bank of England said.

Japan’s yen was lower against the U.S. dollar, changing hands at 109.225. The Bank of Japan’s two-day policy meeting ends on Friday. The central bank’s governor said on Tuesday that it was important to keep long-term interest rates “stably low”.

Germany’s ZEW survey is due at 1000 GMT. There will also be U.S. retail sales data at 12.30 GMT and U.S. industrial production at 13.15 GMT.

Elsewhere, Bitcoin fell to around $55,899.22, having dropped from its latest record high of $61,781.83 on Saturday.

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