Dollar on back foot as focus shifts to Fed meeting; yen gains

Dollar on back foot as focus shifts to Fed meeting; yen gains

SINGAPORE,. The dollar was down today, not far off more than one-week lows as financial markets shifted their attention to this week’s Federal Reserve rates-setting review with traders wagering policymakers would signal a pause to their tightening cycle.

The Federal Open Market Committee meets between January 29-30, and Chairman Jerome Powell is widely expected to acknowledge growing risks to the US economy as global momentum weakens.

“The general direction for the dollar is still down and markets will be taking cues from the FOMC this week,” said Sim Moh Siong, currency strategist at Bank of Singapore.

“The Fed will most likely keep rates steady this year given the state of economic growth outside the US”

The dollar index, a gauge of its value versus six major peers was marginally lower at 95.73. A deal to reopen the US government for now after a prolonged shutdown also reduced investor demand for the safety of the greenback.

Over the past two months or so, Powell and several other Fed policymakers have taken a more cautious approach on further monetary tightening, leaving the dollar underpowered after it enjoyed a boost from the Fed’s four rate increases last year.

Traders are bearish on the dollar for 2019. Amid the backdrop of a weakening global economy and US-Sino trade tensions, the US central bank is widely expected to hold rates steady this year to avoid hurting growth at home. Interest rate futures markets are pricing in no rate hikes for 2019.

The yen added 0.2 per cent in early Asian trade at 109.34.

The dollar has gained around 1.3 per cent on the yen over the last two weeks. Not helping the yen was the Bank of Japan’s downgrade of its inflation forecasts last week when it also maintained its accommodative monetary policy, as widely expected.

Moreover, Japanese investors have been net buyers of foreign bonds over the last few weeks, stoking demand for dollars. This likely explains why the safe-haven yen has not appreciated during this period even though risks of a global economic slowdown have rattled investor sentiment.

The euro was marginally higher at US$1.1411. The single currency managed to cling on to a 0.4 per cent gain made last week despite the European Central Bank downgrading its growth forecasts for the near term. Growth data out of Europe’s economic powerhouses such as Germany and France has been weaker-than-expected and analysts expect the ECB to remain dovish for an extended period.

Traders believe Europe’s slowdown and a dovish ECB are priced into the euro, which has traded in a US$1.12-US$1.16 range over the last three months.

Sterling was up modestly, holding above the key psychological level of US$1.32. The cable gained 2.5 per cent last week after a report in the Sun newspaper that Northern Ireland’s Democratic Unionist Party had privately decided to offer conditional backing for British Prime Minister Theresa May’s Brexit deal this week.

However, Ireland’s Deputy Prime Minister Simon Coveney said yesterday the backstop was already a compromise drawn up to meet May’s negotiating red lines, and the EU and Ireland were united in the view it “was not going to change”.

Analyst expect the sterling to remain volatile. Britain is set to leave the European Union on March 29, but the country’s members of parliament remain far from agreeing a divorce deal.

The Australian dollar was unchanged at US$0.7181 in muted trade as Australian markets were shut for a public holiday. — Reuters