Dollar flat ahead of Fed's rate hike meeting

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Dollar flat ahead of Fed's rate hike meeting

SINGAPORE The dollar was flat against major currencies on Wednesday ahead of an eagerly-awaited Federal Reserve policy decision that investors hope will signal the end of the U.S. central bank's interest rate hiking cycle.

After a series of jumbo rate hikes in 2022 to tame inflation, the market is certain of a 25 basis points bps increase in interest rates later on Wednesday. The news conference of Fed Chair Jerome Powell will be the focus as traders try to gauge how long the Fed is likely to stay hawkish.

The dollar index, which measures the U.S. currency against six major peers, fell 0.029 per cent at 102.06. It fell 0.16 per cent in the previous session, due to a report showing that the U.S. labor costs had increased in the fourth quarter at their slowest pace in a year.

The index has fallen four months in a row. The index is far from the 20 year high of 114.78, which was touched on Sept. 28 as investors price in the Fed at the end of its rate-hike cycle.

Carol Kong, Currency strategist at Commonwealth Bank of Australia, said that recent progress on inflation has encouraged market participants to expect the Fed to pivot from interest rate hikes to interest rate cuts.

She said that because of signs of labour market loosening, the Fed would likely pair a smaller rate hike this week with hawkish communication. The U.S. dollar can enjoy a brief rally if markets reassess their expectations for a quick FOMC pivot. This week, investors will be watching the monetary path taken by the European Central Bank and Bank of England, each of which is expected to raise interest rates by 50 bps on Thursday.

The euro was up 0.04 per cent to $1.0866, while the sterling was last trading at $1.2314, down 0.05 per cent on the day. The yen weakened by 0.10 per cent to 130.25 per dollar.

The Australian dollar was up 0.18 per cent to $0.707, while the kiwi fell 0.05 per cent to $0.644.

The Fed is due to announce its rate decision at 1900 GMT, with prices of Fed funds futures implying that the Fed's benchmark rate will peak at 4.91 per cent in June, then fall to 4.48 per cent by December.

The Fed raised interest rates by 50 bps in December after four successive 75 bps hikes. It said that interest rates might need to be higher for longer to tame inflation.

Since the beginning of the year, the expectations of a soft landing have picked up, according to the rising recession bets seen in the second half of last year, according to Saxo Markets strategists.

There is some reason to believe that Powell and team may be aiming to lengthen the hiking cycle in order to get more time to assess both the incoming data and the impact of their previous aggressive rate hikes. After the main event of the Fed meeting, investors will be focused on ISM manufacturing and job opening data due on Wednesday, which will highlight the state of the U.S. economy and labour market.

The data showed that house price growth slowed considerably in November, adding to growing signs of cooling inflation.

Christopher Wong, OCBC's currency strategist in Singapore said that there were signs of a disinflation trend in the U.S. and this could potentially support the case for Fed to re-calibrate its pace of tightening.