Dollar Declines for Third Day Against Euro Before Fed Decision

  • Futures signal central bank to keep rates on hold this month
  • U.S. currency has dropped versus most major peers this week

The dollar weakened for the third day against the euro before the Federal Reserve announces its monetary policy decision on Wednesday.

The U.S. currency has dropped versus most of its 16 major peers since the start of this week. While no change in interest rates is signaled by futures, traders may focus on the post-meeting statement to provide guidance on when U.S. borrowing costs will increase again.

In January, the Federal Open Market Committee had said it was “closely monitoring” global economic and financial developments, a view Fed Chair Janet Yellen reiterated last month when she said it would be appropriate to “proceed cautiously in adjusting policy.”

“We are discussing if they will postpone a possible June hike,” said Jens Peter Soerensen, chief analyst at Danske Bank A/S in Copenhagen. “Whether they will still remain a little bit dovish, that is the key thing for us. People are a bit reluctant to go in and buy the dollar until they see what the Fed does tonight.”

The dollar depreciated 0.1 percent to $1.1308 per euro as of 7:24 a.m. New York time. It declined 0.7 percent in the previous two days. The U.S. currency was little changed at 111.25 yen, after touching a three-week high of 111.91 on April 25.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, was little changed on Wednesday, and has declined 4.5 percent this year.

The U.S. currency has been weighed down by economic data that have signaled a patchy recovery taking hold. Citi Economic Surprise Index shows gauges of U.S. growth have trailed economist forecasts by a margin that’s widened since March. The reading has been negative since November. That means, on the whole, that data have been undershooting predictions since then.

While futures suggest the Fed will keep its main interest rate unchanged at this meeting, traders boosted the probability of an increase in 2016 to 67 percent, from 55 percent a week ago.

Doubts on the likely tone of the Fed on Wednesday has limited the dollar’s move against the euro to its tightest range in a month, which is the difference between the highest and lowest points reached by the pair during the day.

A dovish view could see the euro climb higher, according to strategists at UniCredit Bank AG, including Vasileios Gkionakis, London-based global head of currency strategy at the lender.

“Euro-dollar may react positively to the FOMC meeting outcome,” they wrote in a note to clients. “But a re-test of recent peaks above $1.14 seems to be unlikely, unless the Fed does soften its stance even further.” The central bank “keeping a prudent approach” to its next policy moves “is unlikely to offer the dollar any help across the board,” they wrote.

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