Currency Swings Shrink as Fed, BOJ Trigger Shuffle to Sidelines

  • Dollar gauge slips third day toward 10-month low before FOMC
  • Most economists polled say BOJ will add to easing on Thursday

Currency volatility sank to the lowest in a month, with most major currencies trading little changed, before the Federal Reserve wraps up its two-day meeting, at which economists and traders see almost zero chance the central bank will raise interest rates.

JPMorgan Chase & Co.’s global currency volatility measure dropped to 10.76 percent, the least since March 22 and below this year’s average. A gauge of the dollar was near a 10-month low before the Federal Open Market Committee’s decision. While analysts see almost zero chance the central bank will boost borrowing costs this week, they are awaiting a signal on whether policy makers are ready to raise rates in June. The Bank of Japan’s two-day meeting ends Thursday.

“The Fed is in a delicate position, and has been for a while -- ever since they started to raise rates last December there have been a number of global factors that have interfered,” said Adnan Akant,  head of currencies in New York at Fischer Francis Trees & Watts Inc., which has about $41 billion under management. “They will tread carefully and try to give a sense that is fairly neutral about June. Rather than setting up for June to be a tightening, we would expect them to give a neutral reading on that.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed as of 11:39 a.m. in New York. It reached a 10-month low of April 19 and has dropped 4.4 percent this year.

The U.S. currency was little changed at 111.29 yen and traded at $1.1312 per euro.

Buying dollars was the winning trade of the past two years as the Fed moved toward higher interest rates while quantitative easing in Europe and Japan, along with a China-led slowdown in emerging markets, weakened rival currencies. The dollar’s rally fizzled as a slowing economy prompted the U.S. central bank to cut growth and inflation forecasts at its last meeting, and set a higher bar for when it may raise rates again following a move in December.

Futures suggest the Fed will keep its main interest rate unchanged at this meeting, though traders boosted the probability of an increase by the end of 2016 to 67 percent, from 54 percent at the end of March. BOJ Governor Haruhiko Kuroda will announce additional easing on Thursday, according to 56 percent of economists surveyed by Bloomberg.

“Market participants are just shuffling by the sidelines before they decide which way to go,” said Vishnu Varathan, senior economist at Mizuho Bank Ltd in Singapore. “They want to look out for whether the FOMC will drop the reference to external uncertainties because that will suggest how cautious they want to be about the hike.”

Japanese Prime Minister Shinzo Abe’s economic adviser, Etsuro Honda, said on Tuesday that this week’s meeting is the time for the BOJ to act if it wants to be pre-emptive.

Japan’s inflation has been hovering around zero for about a year and expectations among companies for price increases have continued to decline. The yen has gained almost 9 percent since the BOJ adopted negative rates at its Jan. 29 meeting, adding deflationary pressure to the economy.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE