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Dollar steady above 13-month low ahead of Fed verdict

7/26/2017, 12:10:03 PMMarket Analysis
Dollar steady above 13-month low ahead of Fed verdict

The dollar bobbed above a 13-month low against a basket of major currencies on Wednesday, as investors awaited the U.S. Federal Reserve's policy statement for clues on the timing of its next monetary tightening.

The Fed is widely expected to keep interest rates unchanged at its two-day meeting that ends on Wednesday. Investors will be watching for any clues on whether it may raise rates again this year, and when it will begin paring its massive bond portfolio.

There is some focus on the possibility that the Fed could hint at September as the starting date for reducing its balance sheet, said Stephen Innes, head of trading in Asia-Pacific for OANDA in Singapore.

Such a hint from the Fed would not come as a big surprise, and may not provide much of a lift to the greenback, Innes wrote in a note, adding, "It will be the inflation language where a possible dovish skew will emerge."

Sluggish inflation has kept the dollar under pressure, and led to uncertainty on whether the Fed will raise interest rates again this year.

The dollar index, which measures the greenback's value against a basket of six major currencies, stood at 94.082. On Tuesday, it had fallen to as low as 93.638, the lowest for the dollar index since June 2016.

Against the yen, the dollar was steady at 111.89 yen, holding gains after rising 0.7 percent on Tuesday.

The dollar regained some ground against major currencies in the previous session, as U.S. Treasury yields rose along with U.S. equities.

But continued uncertainty about the healthcare reform progress, as well as an investigation into Russia's meddling in the 2016 U.S. election and its possible collusion with the Trump campaign, has cast a cloud over the administration's pledges to cut taxes and ramp up spending, analysts said. That has weakened expectations for U.S. growth and inflation.

Those concerns were underscored by news that a U.S. Senate Republican plan to repeal and replace Obamacare failed to get the votes needed for approval.

"The dollar had endured relentless selling over the past month as market was forced to unwind the Trump reflation trade," said Heng Koon How, head of markets strategy for United Overseas Bank in Singapore.

"Some short-term stability will be welcomed," Heng said, adding that the dollar may find some support after U.S. bond yields rose on Tuesday.

The yield on the benchmark 10-year note was at 2.322 percent on Wednesday, compared with its Tuesday close of 2.326 percent, and well above Friday's three-week low of 2.225 percent.

The euro held steady at $1.1647. On Tuesday, the euro rose as high as $1.17125, its highest since August 2015, and just a hair below a 2-1/2 year high, boosted by a stronger-than-expected German business survey.

The Ifo business sentiment index reached a record high, showing that Germans were "euphoric" about the country's business climate.