Dollar hovers near peak as investors await for Fed to taper stimulus

By Tommy Wilkes

LONDON (Reuters) - The dollar hovered near recent peaks versus the euro and the yen on Wednesday as investors waited for the U.S. Federal Reserve to start unwinding its pandemic-era stimulus and to assess Chair Jerome Powell's take on inflationary pressures.

Moves were small in Asia and at the start of the European trading day in the middle of a busy week for central banks, with the Bank of England meeting on Thursday.

The dollar index traded unchanged on the day at 94.11, close to its 2021 peak of 94.563 hit last month.

Against the euro the greenback was also flat at $1.1579, near the $1.1522 low reached in October and which marked the strongest level for the dollar since July 2020.

Dollar/yen traded at 113.94, near a four-year high.

The Fed is expected to announce the tapering of its $120 billion-a-month asset purchase programme in its policy statement at 1800 GMT.

Traders are focused on clues around what that means for rate rises, after a month of seismic bond market moves in anticipation of hikes as soon as next year. [US/]

Analysts are divided as to what the Fed meeting and statement will mean for the dollar.

"The dollar bearish case today is that the tapering is widely expected and an inherently dovish Fed, concerned about upsetting the bond market, does not change its statement substantially," ING strategists wrote.

"Yet at some point, the Fed is going to have to acknowledge that elevated inflation does not 'largely reflect transitory factors'. Many dovish central banks around the world are already doing this and should the Fed start to show greater concern about this today, U.S. rates and the dollar could get a boost."

Investors will watch closely for Chair Powell's assessment of inflation after other central banks have signalled a more hawkish tilt in the face of rising price pressures, although whether that means higher interest rates soon is still to be seen.

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

"Inflation is taking off with an economy that has been pricing itself off zero nominal rates and dramatic negative real rates for the last 18 months," he said.

A day ago, the Reserve Bank of Australia abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes.

The Aussie had dropped 1.2% against the dollar on Tuesday and sat at $0.7448 on Wednesday, up 0.3% from the session open. The kiwi was also dragged 1% lower, but found support on Wednesday from strong labour data and hovered at $0.7134, up 0.3%. [AUD/]

Money markets are pricing in a 15 basis point hike from the Bank of England on Thursday, although a weaker pound this week suggest some nervousness that the BoE could disappoint.

Sterling fell to a two-week low at $1.3606.

 

(Additional reporting by Tom Westbrook in Singapore; editing by Barbara Lewis)