Dollar Nursing Losses Ahead of Federal Reserve Policy Decision

  • Fed policy makers deliberate with inflation still below target
  • Pound trading choppy as angst shows before May’s Brexit speech

Three Charts You Don't Want to Miss on the Fed

The dollar saw afternoon losses as investors looked to the Federal Reserve policy decision due Wednesday, which is expected to include plans for unwinding the central bank’s $4.47 trillion portfolio.

The Bloomberg Dollar Spot index reversed slight gains to fall more than 0.1 percent, with the greenback dropping versus all G-10 peers save the Swiss franc. The biggest winners were the New Zealand and Australian dollars. The euro fell back slightly and then rebounded in choppy trading after a report that the European Central Bank remains divided on policy steps amid the recent strength of the common currency.

  • The afternoon dollar weakness came after the greenback had briefly turned positive as Treasuries declined, returning the 10-year UST yield to a new high for the day above 2.24%. Traders will parse the Fed statement and the dot plot Wednesday to gauge whether sentiment among policy makers has shifted. Inflation in the U.S. appears to have stabilized at levels below policy objectives, and recent hurricanes may have taken a toll on short-term growth. Read more about what analysts are expecting here
  • “Continued purchases by the BOJ and ECB may help buffer the impact of the Fed unwind, while placing some upward pressure” on the USD, especially against the EUR and JPY, BI Economist Michael McDonough writes
  • EUR/USD briefly touched a fresh high of 1.2007, just a pip above an overnight high of 1.2006 reached before offers capped the gain. The common currency earlier dipped to near its overnight low at 1.1950 after the report on ECB differences, but quickly returned to mid-range, influenced by cross flows. The euro was trading higher against a majority of its G-10 peers after early demand was seen for EUR/GBP and EUR/CHF, according to a trader in London
  • USD/JPY returned to above 111.80 before paring its recovery to trade at a slight loss around 111.45. An earlier dip to 111.20 flushed out some intraday longs as stop-loss selling greeted the push below the overnight low at 111.35
    • The dollar rose earlier to as high as 111.88, its highest since July. The rise provided opportunity for domestic Japanese accounts, including exporters, to add hedges on USD receivables, said traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. Further JPY demand may emerge later this month as Japanese accounts seek to balance their books ahead of the fiscal half-year on Sept. 30
  • GBP/USD was trading ~1.3523 after rebounding from near its session low in a move that followed close on the heels of a report that Boris Johnson, Britain’s foreign secretary, could resign if some of his Brexit-related demands are not met. U.K. PM May is due to hold a cabinet meeting this week before delivering a key speech on Brexit in Florence on Friday
  • NZD and AUD both rose nearly 0.7% vs the USD amid an improvement in risk sentiment. The New Zealand dollar advanced as models bought the currency vs CHF and JPY. Meanwhile, Aussie extended gains that began after upbeat RBA minutes released overnight
  • U.S. economic data showed August housing starts fell to a 1.180m annual rate vs 1.190m in the previous month; the estimate was 1.174m. The previous month’s data was also revised higher, signaling strength in the housing sector
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