The dollar was near five-week lows on Wednesday ahead of the U.S. Federal Reserve's policy meeting, with investors awaiting clarity on the path the central bank will take in the wake of global banking turmoil.
There isn't a lot of investor attention on whether or not the Fed will stick to its hawkish path to fight sticky inflation or pause interest rate hikes due to recent problems with banks that included bankruptcy and last minute rescues.
The U.S. dollar index was at 103.19, just above the five-week low of 102.99 touched overnight. The euro was at $1.0770, hovering around a five-week high of $1.0789 scaled overnight.
Markets are now pricing in about a 15 per cent chance of the Fed not increasing rates, with a roughly 85 per cent chance of a 25 basis point hike, according to the CME FedWatch tool. A month earlier, the market was pricing in a 24 per cent chance of a 50 basis point hike.
After high-profile U.S. banking failures earlier in the month and the rescue of Credit Suisse Group AG at the weekend, investor sentiment remained fragile, with worries over the outlook for the banking sector starting to come to a halt.
Rodrigo Catril, a senior currency strategist at the National Australia Bank in Sydney, said markets are more comfortable with the idea that authorities have probably done enough to prevent a systemic banking crisis.
It may be early days but the price action over the past 48 hours shows a change in mood by investors. The Fed meeting ends on Wednesday at 2 p.m. EDT 1800 GMT with the release of a policy statement, followed by a news conference by Chair Jerome Powell a half hour later.
Catril said the Fed had to make a difficult decision because of the strong labor market in February and higher inflation figures that were higher than many market watchers expected. Such circumstances would normally be ripe for a return to a 50 basis point hike if there were no worries over financial stability, he said.
Christopher Wong, a strategist at OCBC, said the focus would be on how the Fed communicates its forward guidance, in particular the higher for longer rhetoric.
We would like the Fed to go with a 25 basis point hike this meeting, tone down the hawkish guidance and emphasize that policy decisions at subsequent meetings will continue to be data-dependent, Wong said. This wishlist wants to see the dollar trade on the softer profile and risk proxies trade steadily. The yen gained by 0.04 per cent to 132.47 per dollar, while sterling was trading at $1.2233, up 0.16 per cent on the day.
The Australian dollar went up 0.36 per cent to $0.6694, while the New Zealand dollar gained 0.11 per cent to $0.6199.
The last time in cryptocurrencies went up by 0.44 per cent to $28,276. It was 58, but was below the nine-month peak it touched on Monday.