The dollar fell back from a near one-week high versus a basket of major currencies on Wednesday, with losses limited in the countdown to an expected hike in US interest rates later in the day.
The Federal Reserve is widely expected to deliver its first rate increase in nearly a decade at 1900 GMT. After more than a year of anticipation, investors are more eager to know how quickly the central bank will tighten following the initial rate adjustment.
Citi, the FX market’s single biggest player and hedge funds’ partner of choice, say that positioning in the dollar against the euro is all but flat after a clearout over the past fortnight.
That suggests the action after the Fed’s first move in a decade is more likely to come on a handful of emerging currencies and in credit and other markets than on the big FX pairs.
“Markets are going into the announcement expecting a rate hike but, on the surface at least, relatively relaxed that it is priced in,’’ said Kit Juckes, a strategist with France's Societe Generale in London.
“If 10-year treasury yields stay close to today’s levels, I don’t see much of a move in the euro or yen. But I do think that in the long run there is enough momentum in the US economy for yields to edge higher and that will drag the euro lower.’’
Early in London trade, the dollar was less than 0.1 per cent lower versus a basket of major currencies at 98.174. It rose 0.6 per cent on Tuesday to a peak of 98.292, its highest since December 9. Against the euro it was flat at $1.0936, having also hit its highest in a week.
“There was the feeling at one point yesterday that some people were loading up on dollar longs again,’’ said a dealer with one bank in London. “It doesn't feel like there is much chance (Fed chief Janet) Yellen could be more dovish than the market pricing suggests.’’
Against the yen, the greenback inched up 0.1 per cent to 121.71 yen.
“With USD positioning now substantially reduced and the USD trading at more attractive levels versus key G10 currencies, we think the USD is more likely to gain immediately in the aftermath of Fed tightening,’’ analysts at BNP Paribas wrote in a note to clients.
This month’s drop in the dollar versus yen and the euro’s rise against the dollar suggest that short-term players have pared back their long dollar positions, said a trader for a Japanese bank.
The Australian dollar was a touch lower at $0.7191, having shed 0.7 per cent on Tuesday. Reserve Bank of Australia Governor Glenn Stevens said in an interview with the Financial Review that he expected the currency could weaken further in sympathy with falling commodity prices.
Stevens, though, gave an upbeat assessment on the economy, setting the bar high for any further cuts in rates.