The euro held firm on Tuesday after soft US data and nerves ahead of this week’s Federal Reserve policy meeting broke the dollar’s rally and helped the common currency pull out from 12-year lows.

The euro was steady at $1.0568, having rebounded overnight from $1.0457, its lowest since 2003.

The euro has been under pressure since the European Central Bank activated its €1 trillion bond-buying quantitative easing scheme last week and drove the euro zone bond yields to record lows.

Tepid US data

It got some relief after Monday’s weaker-than-expected US manufacturing, industrial output and housing data pushed down US debt yields and cooled the dollar’s advance.

Traders see the market getting little nervous ahead of the Fed’s policy-setting meeting on Tuesday and Wednesday.

Fed policy stance

Expectations have been rising that the Fed will drop the word “patient’’ from its statement on the timing of interest rate increases — which has fanned expectations for tightening as early as June and helped prompt the dollar's recent surge.

But some traders have also cautioned that the dollar’s strength and its potential negative impact on the economy might be mentioned by the Fed.

“The focal point for the Federal Open Market Committee meeting still remains whether ‘patient’ will be dropped or not, and another word might be used as a replacement,’’ said Junichi Ishikawa, market analyst at IG Securities in Tokyo.

“But the dollar’s recent strength, which is very much a political factor as well, may also get a mention and hurt dollar longs. It is a factor that participants will be keeping at the back of their minds,’’ he said.

Participants will also keep an eye on how other asset markets react to the Fed’s statement and comments from its chair Janet Yellen after the meeting.

“The main point is how Treasury yields respond to the Fed. Despite the removal of ‘patience’, prospects of a September, rather than June, rate hike may linger given the dollar’s appreciation and lower oil prices,’’ said a currency trader at a large Japanese bank.

“Yields are likely to start rising when ‘patience’ is removed and support the dollar, but the key is whether yields can remain elevated even if the prospect of a September hike are seen to remain intact,’’ he said.

Dollar vs yen

The dollar inched up 0.1 per cent to 121.44 yen, stuck in a relatively narrow range since advancing to an eight-year high of 122.04 on March 10.

The Bank of Japan concluded its two-day policy meeting on Tuesday, at which the central bank stood pat on monetary policy and maintained its massive stimulus. Market reaction was limited because the outcome was as expected.

The dollar index was little changed at 99.713 after pulling back from a 12-year high above 100.00 struck late last week.

RBA rate cut

The Australian dollar dipped slightly after minutes of the Reserve Bank of Australia’s showed policymakers had left the door open at their latest policy meeting for further interest rate cuts.

The RBA cut interest rates to a record low of 2.25 per cent in February and stood pat this month.

The Aussie was down 0.2 per cent at $0.7623, crawling closer to a six-year trough of $0.7561 plumbed last week.

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