Dollar creeps higher as Fed’s taper looms


Dollar and yuan

Dilok Klaisataporn | Getty Images

The dollar began the week firmly on Monday with investors in a cautious mood ahead of several central bank meetings, headlined by the Federal Reserve, while looming catastrophe at indebted developer China Evergrande added to markets’ fragility.

In thin trade, owing to holidays in Japan and China, the euro nursed losses from its weakest week in a month, slipping slightly to touch a four-week low of $1.1721.

Sterling and the Australian and New Zealand dollars were also pressured toward new troughs. The kiwi, at $0.7024, and sterling, at $1.3722, made three week lows as did the Aussie which fell 0.1% to $0.7253.

“The U.S. dollar is having a bit of a rebound,” said Westpac analyst Imre Speizer, drawing support, he added, both from an expectation of imminent asset purchase reductions from the Fed and from caution as equity markets begin to get the wobbles.

“Everyone is eying the Fed, waiting for a tapering signal.”

The U.S. dollar index rose very slightly to a month-high 93.263. The yen held at 110.01 per dollar.

The week brings central banks in Japan, the UK, Switzerland, Sweden, Norway, Indonesia, the Philippines, Taiwan, Brazil, South Africa, Turkey and and Hungary as well as elections in Canada and Germany — though traders are mostly focused on the Fed.

The Fed concludes a two-day meeting on Wednesday and markets’ consensus is that it will stick with broad plans to begin tapering this year but will hold off providing details or a timeline for a at least a month.

Creeping U.S. yields, however, which at the 10-year tenor rose for a fourth straight week last week point to risks of a hawkish surprise or a shift in projections to show hikes as soon a 2022, both of which could support the dollar.

It would only take two Fed members to change their minds for the “dot plot” of median projections to reflect hikes next year, said Marshall Gittler of brokerage BDSwiss.

“So it’s quite possible that they go from forecasting no rate rises next year to at least one,” he said.

“Similarly, they are now forecasting two hikes in 2023 – that could easily go to three as well.”

Among the other major central banks the Bank of England is expected to leave policy settings unchanged, but traders see potential for gains in the currency if the bank adopts a hawkish tone or more members being calling for asset purchase tapering.

There is no expectation of policy shifts at the resolutely dovish Bank of Japan on Wednesday, but a day later Norway’s Norges Bank is expected to becomes the first G10 central bank to lift rates.

The Norwegian crown had slipped with oil prices and the rising dollar on Friday and last sat at a one-and-a-half-week low of 8.7154 per dollar.

The oil-sensitive Canadian dollar was also on the back foot ahead of an election on Monday where polling points to an advantage for incumbent Prime Minister Justin Trudeau but a likelihood he remains leader of a minority government.

In China, onshore stock and currency markets were closed on Monday but the yuan was under pressure offshore as the debt crisis engulfing Evergrande added to discomfort over China’s slowing economy and regulatory crackdowns.

The yuan fell about 0.1% and through its 200-day moving average to 6.4770 per dollar. Evergrande has a bond interest payment of $83.5 million due on Thursday.