Dollar on tenterhooks as investors await Fed policy clues

The dollar drifted in recent ranges in the calm before a forecast Federal Reserve storm, as investors awaited signals later in the global session on the Fed's policy outlook.

The dollar index, which tracks the greenback against a basket of six major rivals, was flat at 97.007. Against the yen, the dollar was steady on the day at 110.11 , while the euro was also unchanged at $1.1210.

The Fed is scheduled to announce its monetary policy decision at 2 pm eastern time (1800 GMT) on Wednesday at the end of a two-day policy meeting, and may also provide more clues on how it plans to reduce its holdings of more than $4 trillion in Treasuries and mortgage-backed securities.

Economists polled by

Reuters overwhelmingly see the US central bank hiking its benchmark rate to a target range of 1.00 to 1.25 per cent this week, though expectations for further rate increases are fading. What emerges from the Fed meeting “is certainly going to chart the course for a lot, including the strength of the dollar,” said Bill Northey, chief investment officer at the private client group of U.S. Bank in Helena, Montana, who spoke from Minneapolis. “There is some risk that we could see a more dovish outlook,” he said.

Fed funds futures on Tuesday suggested traders saw about a 29 per cent chance of rates rising to 1.25-1.50 per cent at the Fed's Sept. 19-20 meeting, and a 57 per cent chance of such a move at its Dec. 12-13 meeting.

The Bank of Japan, which is also meeting this week, is expected to keep its monetary policy unchanged.

The New Zealand dollar slipped 0.2 per cent to $0.7206 after touching a low of $0.7200, moving away from the previous session's nearly four-month high of $0.7228. New Zealand's current account deficit as a proportion of gross domestic product widened in the March quarter to its most in a year, data out on Wednesday showed.

The dollar steadied against its Canadian counterpart after skidding to its lowest levels since late February in the wake of hawkish comments from Bank of Canada Governor Stephen Poloz, who signalled that the BOC could raise interest rates sooner than previously thought.

The US dollar was flat on the day at C$1.3236 after falling as far as C$1.3209, its lowest since Feb. 28.