Dollar Slips as Fed Decision Awaited, Yen Supported

Investing.com - The U.S. dollar slid lower against a currency basket on Tuesday ahead of this week's Federal Reserve meeting while the yen remained supported amid concerns over the outlook for global growth.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, edged down to a one-week low of 96.42 by 03:30 AM ET (08:30 AM GMT).

With the Fed widely expected to deliver its fourth rate hike this year at the conclusion of its two-day policy meeting on Wednesday moves in the dollar will be guided by its forward guidance.

"We are expecting a dovish hike by the Fed. The data has not been tepid enough for the central bank not to hike in December," said Rodrigo Catril, senior currency strategist at NAB.

Senior Fed officials, including Fed Chairman Jerome Powell, have recently become more cautious about the policy outlook that underlined a shift in market sentiment from a few months ago on rising signs of a slackening in the global economy.

While the U.S. central bank's latest median dot plot projections from September indicated its willingness to raise rates three times in 2019, the interest rate futures market is pricing in only one more rate hike for 2019.

This mismatch largely reflects a belief that higher U.S. borrowing costs will likely hurt U.S. growth and ultimately force the Fed to slow the pace of rate hikes.

The U.S. economy, which has been growing strongly this year, has started to show signs of fatigue, adding to growing evidence elsewhere including in Europe and China of cooling momentum.

Yet it may not be all gloom for the greenback. Some analysts think dollar strength can return if the Fed remains relatively confident about next year's monetary tightening path.

"Most investors expect the central bank to be less hawkish so if the Fed makes it clear that further rate hikes are needed and there's still scope for 3 rounds of tightening, the dollar will soar regardless of Powell's concerns about the economy," said Kathy Lien, managing director of currency strategy in a note.

In a tweet overnight, U.S. President Donald Trump took another swipe at the Fed's expected rate increase this week, saying it was 'incredible' for the central bank to even consider tightening given the global economic and political uncertainties. The markets, however, looked past Trump's now-familiar comments on the Fed.

The greenback was weaker against the yen, with USD/JPY losing 0.31% to trade at 112.48 as risk aversion underpinned safe haven demand.

The traditional safe haven Swiss franc also gained ground, with USD/CHF dipping 0.13% to 0.9916.

"The Japanese yen and Swiss franc are likely to take on the mantle of safe havens from the greenback for the time being," NAB's Catril said.

Yen traders are also focusing on the Bank of Japan's meeting on Dec. 19-20, at which it is widely expected to keep policy ultra-loose as inflation remains well below its target.

The euro pushed higher, with EUR/USD rising 0.19% to 1.1367.

The pound was also higher, with GBP/USD advancing 0.32% to 1.2657 amid an ongoing political deadlock over Britain’s efforts to exit the European Union.

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