Dollar Slides as Traders Weigh How Much Turmoil May Sway Fed

  • Greenback fluctuates amid five-day decline before meeting
  • Aussie climbs after inflation rises faster than forecast

The dollar declined from week-ago levels as markets awaited the Federal Reserve’s announcement on interest rates.

The greenback swung between gains and losses Wednesday against most of its major peers as traders weighed whether the market turmoil that has greeted the start of 2016 will prompt U.S. policy makers to signal a slower pace of interest-rate increases. Australia’s dollar climbed after data showed stronger-than-predicted inflation in the fourth quarter.

“The market is cautious ahead of the Fed meeting," said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. “The talk is that the Fed will sound dovish. We think that they will not make a reference to the March meeting for the next hike, but direct expectations more towards June.”

Traders are jittery ahead of central-bank meetings in the U.S., Japan and New Zealand amid speculation that policy makers will be forced to address the volatile markets. A gauge of the greenback has risen 1 percent this month, extending the currency’s two-year rally, on speculation that the Fed will boost borrowing costs in contrast to easing by its global peers.

The Bloomberg Dollar Spot Index was little changed at 1,249.23 as of 10:47 a.m. in New York after sliding 0.2 since Jan. 20. The greenback was at $1.0873 per euro and 118.67 yen. The Aussie rose 0.6 percent.

Commodity Slump

Australia’s dollar has fallen 3.3 percent this year, the fourth-biggest loss among 16 major currencies tracked by Bloomberg, amid concern that the nation’s commodity exports will fall because of a slowdown in China.

Before the current turmoil, Fed officials indicated they expected four interest-rate increases in 2016. The probability of an increase this week has stayed low after the December liftoff, and chances the Federal Open Market Committee will raise borrowing costs in March have fallen to one-in-four from even odds at the start of the year.

“The Fed will remain as assiduously neutral as possible in order to give it enough latitude to hike in March should conditions improve,” Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management, said in a note. “For that reason, the FOMC may understate the recent downside risks in the economy and could disappoint traders who are looking for a more transparent, dovish assessment.”

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