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Dollar Holding below 19-Month Highs with Fed in Focus

12/17/2018, 11:35:57 AMTrading Strategies
Dollar Holding below 19-Month Highs with Fed in Focus

The U.S. dollar was holding steady below 19-month highs against a currency basket on Monday as concerns over the outlook for global growth kept sentiment subdued ahead of this week’s Federal Reserve policy meeting.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was little changed at 96.86 by 03:41 AM ET (08:41 AM GMT), below the 19-month high of 97.70 it hit on Friday.

The dollar strengthened broadly on Friday after robust economic data indicated that the U.S. economy appeared to be in better shape than others.

Weaker-than-expected economic data from China and Europe and fears of a possible U.S. government shutdown have also underpinned safe haven demand for the greenback.

Investors were looking ahead to the upcoming Fed meeting, with the U.S. central bank widely expected to hike rates for the fourth time this year when it delivers its latest policy decision at the conclusion on its two-day meeting on Wednesday.

The Fed has hiked rates eight times since December 2015 in a bid to restore policy to more normal settings after having slashed borrowing costs to near zero to combat the financial crisis a decade ago.

With the hike largely factored in by the market, larger moves in the dollar will be guided by the Fed's forward guidance.

According to their projections in September, the median view among the Fed's policymakers was for three rate hikes in 2019. However, interest rate futures used to gauge the probability of further hikes are pricing in only one hike in 2019.

Recent comments by Fed officials have been read as dovish by some analysts. Last month, Fed Chairman Jerome Powell said rates were near the range of policymakers' estimates of "neutral" - the level at which they neither stimulate nor impede the economy.

"You could argue that if the Fed lower estimates, that could be taken as a further sign of economic slowdown," said Hirokazu Kabeya, chief global strategist at Daiwa Securities.

"But given the fragile market sentiment, I would think it would be more dangerous if the Fed sticks to the view that it would raise rates three times next year."

The dollar edged higher against the yen, with USD/JPY ticking up to 113.45.

The Bank of Japan has a meeting on Dec. 19-20, at which policy is expected to remain highly accommodative as inflation remains well below its target.

The euro was little changed, with EUR/USD changing hands at 1.1312 after ending last week down 0.6%.

Sterling was steady, with GBP/USD at 1.2585, holding above last Wednesday’s 20-month lows of 1.2476 as uncertainty over Brexit continued to weigh.

British Prime Minister Theresa May was expected to state her opposition to a second Brexit referendum later Monday, telling parliament such a vote would "break faith" with British people and do "irreparable damage" to politics, according to extracts of her speech released in advance.