LONDON, Sept 18 (Askume) – The dollar lost overnight gains against the yen on Wednesday as investors shifted their stance ahead of a U.S. policy meeting in hopes of easing policy rates.
The Federal Reserve is expected to cut interest rates for the first time in more than four years at 1800 GMT , with the market seeing a 63% chance of a 50 basis point rate cut.
The dollar has fallen along with US interest rates since July and is now at $1.1124 per euro, not far from this year’s lowest level of $1.1201. There are expectations that interest rates could be cut by more than 100 basis points before Christmas.
The yen has gained more than 12% since July, with the Bank of Japan (which sets policy on Fridays) raising interest rates while the Federal Reserve looks set to cut rates.
The greenback was up about 0.45% at $141.78 on Wednesday, recovering about a third of its overnight losses. The yen fell 0.33% to 157.72 against the euro.
Elsewhere, the Australian dollar hit a two-week high of $0.67885 against the US dollar, while rising milk prices supported the New Zealand dollar at $0.6225, although the direction was uncertain ahead of the Fed meeting.
“I think the market is struggling to find direction ahead of the FOMC today,” ING currency strategist Francesco Pesole said of the FOMC.
Traders said the Fed’s stance and the extent of rate cuts would also influence the foreign exchange market reaction.
“If the Fed takes a dovish stance enough, it usually weakens the dollar,” said Nathan Swamy, head of foreign exchange trading at Citigroup in Singapore.
But Swamy said if the Fed’s policy is too accommodative, it could lead to panic in the market as the economy could face a deeper downturn than expected and in this situation risk-sensitive and emerging market currencies could fall.
On the other hand, Pesolo said a 25 basis point cut in interest rates would ease pressure on the dollar.
But Pesol added, “the outcome of the U.S. jobs report in the coming days and weeks will depend on the press conference and the overall tone” as markets are still deciding whether to invest in the dollar for the long term or turn it down if the Fed signals it is willing to cut interest rates by 50% by the end of the year, the basic point being, they would be quite reluctant.
“Still, regardless of the message, the Fed’s easing policy will weigh on the dollar in the long term,” said Sean Osborne, chief currency strategist at Scotiabank.
After overnight data showed US retail sales unexpectedly rose by 0.1% in August, compared with expectations of a 0.2% contraction, the Atlanta Federal Reserve Bank’s GDPNow forecast was raised to 3% from 2.5%, which could raise the possibility of a slight interest in a rate cut by the Federal Reserve.
As Chinese markets resumed trading on Wednesday after the Mid-Autumn Festival holiday, the yuan traded within a stable range not seen since January. The currency was steady at $7.0893 against the U.S. dollar.
The pound has been the best-performing G10 currency this year, rising to $1.3212 on signs of economic stability and steady inflation. Official data showed Britain’s annual inflation rate was 2.2% in August , the same as in July, but price growth in the services industry, which the Bank of England monitors closely, accelerated.
Preliminary data confirmed that European inflation fell to 2.2% in August . All eyes are now on the Federal Reserve.
“The market is betting on a 41 basis point rate cut, which is a long way from any realistic competitor (25 basis points or 50 basis points), so volatility looks almost certain,” ANZ analysts said in a note to clients.
