Dollar pauses for breath, NZD on edge ahead of Fed meeting

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Dollar pauses for breath, NZD on edge ahead of Fed meeting

SYDNEY, Nov 24, Reuters -- The dollar paused for breath on Wednesday after it increased with bets on higher rates when Jerome Powell was picked for a second term as the Federal Reserve Chair, while the New Zealand dollar was on edge ahead of a decision on a rate-hike path.

In emerging markets, the Turkish lira collapsed and fell more than 11% in one session overnight, setting the scene for further capital outflows and possibly putting pressure on EM currencies around the world.

The market has steadily increased after the dollar's jump.

Even though a hike is expected and pricing suggests a 40% chance that it is a big one, the kiwi has been slipping ahead of the Reserve Bank of New Zealand meeting, which is the main focus of traders in the Asia session.

Adam Cole, chief currency strategist at RBC Capital Markets said that although markets already price in some risk of a 50 bp hike, such a move would still see NZD gain as the implied risk of more 50 bp moves in the hiking cycle increases.

A hawkish statement and higher forward guidance should limit the damage if RBNZ opts for the majority expectation of 25 bp. New Zealand's currency sat at $0.6951 ahead of the meeting, which is at 0100 GMT, after dropping overnight to a six-week low of $0.6917.

There were only slight moves and the dollar clung to hefty gains as aggressive shifts in rates markets and interest rate expectations flowed into currency trade.

The dollar touched a more than four-year high of 115.19 yen on Tuesday as two-year Treasury yields surged to their highest levels since March 2020 and Fed funds futures priced in as many as two rate hikes next year.

Markets think Powell is more likely to respond sooner and harder to inflation than Lael Brainard, the other contender for the job who has been nominated as vice chair.

The euro, which has been hammered by a growing gulf in the economic and monetary policy outlook on either side of the Atlantic, received a small reprieve from stronger than expected business growth surveys.

It recovered barely to trade at $1.1248 on Wednesday after finding a new 16 month low of $1.2226 on Tuesday.

The pound touched an 11 month low of $1.3344 against the rising dollar and the risk-sensitive Australian dollar hovered above $0.7255 after falling to a seven week low of $0.7207 overnight.