The U.S dollar, on Wednesday, December 14, slumped in the run-in to the Federal Reserve’s policy statement later in the day, with an almost 1 percent fall this week.
The dollar was just over 0.1 percent down against a basket of currencies in midday trade in Europe. The euro inched up to $1.0645 and the yen rose 0.2 percent to 114.93 to the dollar.
The Fed is seen as all but certain to raise its main rate by a quarter point to 0.50-0.75 percent. It will be Chair Janet Yellen’s tone, and new forecasts for future rates, that will drive the market response, Reuters reports.
Talk among traders this week has focussed on the risks of policymakers expressing concern at the dollar’s gains or alternatively ramping up the predicted pace of future rate hikes in response to President-elect Donald Trump’s spending plans.
“Last year’s template was for dollar long positions to be pared into the (rate rise) event,” said Jeremy Stretch, head of currency strategy with CIBC in London.
“This time it has been slower but overall I think we are seeing some lightening of positions. If you have been riding the dollar rally, it makes sense to take some money off the table and come back once the dust has settled.”
The major investment banks are mainly upbeat on the dollar’s prospects for next year after a bullish month following Trump’s election. Higher inflation expectations have encouraged more bullish forecasts for U.S. rates next year, and Fed policymakers may play into that by raising their own predictions.
But the pullback this week points to doubts on any push past parity with the euro. Investors also seem more nervous about further weakening the market’s safe haven of choice, the yen, given a raft of political risks to global growth next year.
