The Dollar weakens; the Fed meeting in focus

By Peter Nurse

The dollar was lower at the beginning of the european session on Wednesday, investors are wary at the approach of the last meeting of the federal Reserve.

At 9: 50 am, the dollar index, which tracks the greenback against a basket of six other currencies, fell 0.1 % to 96,233, a level never reached since the beginning of march. The USD/JPY declined 0.3 % to 107,44, while the EUR/USD is set to 1,1347, up 0.1 %.

The u.s. central bank ends its last two-day meeting later Wednesday, and although no major change is expected, the Fed could announce steps to curb the recent hike in bond yields.

Most analysts downplay the possibility that the Fed adopts a control of the rate curve to guide the yields of the 10-year Treasury to fall, but the uncertainty as to the outcome of the meeting of the Fed could keep the dollar under pressure.

“We believe that the Fed is satisfied that its programme of quantitative easing unlimited, open and flexible and does not think she will win a lot by announcing a goal of purchasing monthly”, said the analysts of the Danske Bank, in a research note. “We do not expect the Fed to implement a control of the interest rate curve.”

“The Fed can afford to wait and see what it is all about control of the interest rate curve”, has agreed Masafumi Yamamoto, chief strategist of the currency at Mizuho Securities in Tokyo, “because the u.s. economy has passed the crisis phase and is only now entering the recovery phase”.

Elsewhere, the GBP/USD is trading at 1,2766, an increase of 0.3 %, which is not far from a peak about three months. One may wonder, however, how long will the pound sterling be able to keep this strength, given the uncertainty over its trade negotiations of Brexit with the european Union.

“The possibility of extending the transition period expires on July 1st and despite the good economic reasons to give more time to negotiate the ongoing relationship (especially now that the Uk and the EU are in recession), we do not expect that the United Kingdom request for an extension,” said Danske Bank.

The basic assumption of the bank remains that the two parties may conclude a single free trade agreement on trade in goods (and not services) before the end of the year, but the risk of non-agreement on the Brexit has increased.

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