Dollar stays close of 2016 peaks ahead of Fed's interest rate hike

Dollar stays close of 2016 peaks ahead of Fed's interest rate hike

SINGAPORE -- The dollar held within a striking distance of the year's peaks on the euro and yen on Wednesday as investors wanted the Federal Reserve to be faster in unwinding pandemic-era policy support than central banks in Europe and Japan.

In Asia moves were slight due to the Fed's meeting later in the day, the dollar bought 113.94 yen, against a 2021 peak of 114.69, and traded at $1.1578 per euro against the year's top of $1.1522 per euro. The U.S. dollar index went up for overnight gains to 94.117 at the beginning of the day.

The Fed will announce the creation of its 120 billion a month asset purchase programme at 1800 GMT, according to its policy statement.

After a month of seismic moves in the bond market in anticipation of a hikes as soon as next year, traders are focused on clues about what that means for timing of rate rising. The Reserve Bank of Australia took down its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because of the bank's push back on aggressive pricing for 2022.

The Aussie slumped by 1.2% against the dollar on Tuesday and sat at $0.7430 on Wednesday. The kiwi was dropped 1% lower on Wednesday, but found support from strong labour data and hovered at $0.7123. The Fed funds rate won't get much higher than 1.75% through the cycle as traders think the relative pace of policy tightening will affect markets' perception of the relative pace of policy tightening.

The Deutsche Bank strategist Alan Ruskin said that Fed Policy is under challenge in ways that cannot be remembered since the early Volcker years.

He said that the economy has been pricing off zero nominal rates and dramatic negative real rates for the last 18 months.

The dollar has been held back by rising expectations of faster hiking elsewhere in the world, but risks are going to be big when traders think that more than a few rate increases will be needed to Tame fast-rising prices.

The market expectations on the terminal funds rate at near 1.75% by the end of 2026 looking too low if the real economy is able to rate hikes, and inflation is similarly stubborn, he said.

A Bank of England meeting is also ahead this week, where swaps pricing points to a modest rate increase, but a falling currency suggests a risk of disappointment or at least a fairly stern pushback against market inflation expectations.

I lean towards a 15 bps increase at this meeting with a 5 -- 4 vote in favour, said Luke Suddards, strategist at Pepperstone.

The risk is for sterling to weaken if they decided rather to hold and we see some dovish repricing in money markets because this is baked into the price. The pound sat just above a two week low at $1.3620 in Asia, but is near the bottom half of the range it has traded since July.

The French central bank head Francois Villeroy de Galhau is the most notable at 1300 GMT because of the Fed meeting.