Dollar eases as focus shifts to Fed meeting; yen and Aussie dollar gain

The dollar index, a gauge of its value versus six major peers was marginally lower at 95.74, after falling 0.8 percent on Friday


SINGAPORE: The dollar eased versus most of its peers on Monday as investors turned their attention to this week’s Federal Reserve policy meeting, with traders wagering policymakers will signal a pause in their tightening cycle.

The Federal Open Market Committee meets between Jan 29-30, and Chairman Jerome Powell is widely expected to acknowledge growing risks to the U.S. economy as global momentum weakens.

The dollar fell 0.2 percent versus the offshore yuan to 6.7406. The rally in the yuan also fuelled a bounce in the Australian dollar, which gained 0.18 percent versus the dollar to $0.7195.

Kiwi dollar strengthened by 0.3 percent to $0.6859.

The dollar index, a gauge of its value versus six major peers was marginally lower at 95.74, after falling 0.8 percent on Friday.

A deal to reopen the U.S. government for now after a prolonged shutdown also reduced investor demand for the safety of the greenback.

Over the past two months or so, Powell and several other Fed policymakers have taken a more cautious approach on further monetary tightening, leaving the dollar underpowered after it enjoyed a boost from the Fed’s four rate increases last year.

Traders are bearish on the dollar for 2019.

Amid a weakening global economy and U.S.-Sino trade tensions, the U.S. central bank is widely expected to hold rates steady this year to avoid hurting growth at home. Interest rate futures markets are pricing in no rate hikes for 2019.

Investors are also anxiously waiting for news from high-level U.S.-China trade talks on Tuesday and Wednesday to see if the world’s largest economies can reach a compromise that will end their trade war. President Donald Trump has threatened to hike tariffs on Chinese goods if there is no significant progress in the negotiations.

The yen added 0.2 percent in early Asian trade at 109.34.

The dollar has gained around 1.2 percent on the yen over the last two weeks. Not helping the yen was the Bank of Japan’s downgrade of its inflation forecasts last week when it also maintained its accommodative monetary policy, as widely expected.

Moreover, Japanese investors have been net buyers of foreign bonds over the last few weeks, stoking demand for dollars. This likely explains why the safe-haven yen has not appreciated during this period even though risks of a global economic slowdown have rattled investor sentiment.

The euro was marginally higher at $1.1411.

The single currency managed to cling on to a 0.4 percent gain made last week despite the European Central Bank downgrading its growth forecasts for the near term.

Growth data out of Europe’s economic powerhouses such as Germany and France has been weaker-than-expected and analysts expect the ECB to remain dovish for an extended period.

Traders believe Europe’s slowdown and a dovish ECB are priced into the euro, which has traded in a $1.12-$1.16 range over the last three months.

Sterling was marginally lower, fetching $1.3193.

Cable gained 2.5 percent last week after a report in the Sun newspaper that Northern Ireland’s Democratic Unionist Party had privately decided to offer conditional backing for British Prime Minister Theresa May’s Brexit deal this week.

However, Ireland’s Deputy Prime Minister Simon Coveney said on Sunday the backstop was already a compromise drawn up to meet May’s negotiating red lines, and the EU and Ireland were united in the view it “was not going to change”.

Analyst expect sterling to remain volatile. Britain is set to leave the European Union on March 29, but the country’s members of parliament remain far from agreeing a divorce deal.