Dollar on back foot as focus shifts to Fed meeting; yen gains

FILE PHOTO: FILE PHOTO: United States one dollar bills seen on a light table at the Bureau of Engraving and Printing in Washington
FILE PHOTO: United States one dollar bills on a light table at the Bureau of Engraving and Printing in Washington Nov. 14, 2014. REUTERS Gary Cameron/File Photo/File Photo

January 28, 2019

By Vatsal Srivastava

SINGAPORE (Reuters) – The dollar was down on Monday, not far off more than one-week lows as financial markets shifted their attention to this week’s Federal Reserve rates-setting review with traders wagering policymakers would signal a pause to their tightening cycle.

The Federal Open Market Committee meets between Jan 29-30, and Chairman Jerome Powell is widely expected to acknowledge growing risks to the U.S. economy as global momentum weakens.

“The general direction for the dollar is still down and markets will be taking cues from the FOMC this week,” said Sim Moh Siong, currency strategist at Bank of Singapore.

“The Fed will most likely keep rates steady this year given the state of economic growth outside the U.S.”

The dollar index, a gauge of its value versus six major peers <.DXY> was marginally lower at 95.73. A deal to reopen the U.S. government for now after a prolonged shutdown also reduced investor demand for the safety of the greenback.

Over the past two months or so, Powell and several other Fed policymakers have taken a more cautious approach on further monetary tightening, leaving the dollar underpowered after it enjoyed a boost from the Fed’s four rate increases last year.

Traders are bearish on the dollar for 2019. Amid the backdrop of a weakening global economy and U.S.-Sino trade tensions, the U.S. central bank is widely expected to hold rates steady this year to avoid hurting growth at home. Interest rate futures markets are pricing in no rate hikes for 2019.

The yen <JPY=> added 0.2 percent in early Asian trade at 109.34.

The dollar has gained around 1.3 percent on the yen over the last two weeks. Not helping the yen was the Bank of Japan’s downgrade of its inflation forecasts last week when it also maintained its accommodative monetary policy, as widely expected.

Moreover, Japanese investors have been net buyers of foreign bonds over the last few weeks, stoking demand for dollars. This likely explains why the safe-haven yen has not appreciated during this period even though risks of a global economic slowdown have rattled investor sentiment.

The euro <EUR=> was marginally higher at $1.1411. The single currency managed to cling on to a 0.4 percent gain made last week despite the European Central Bank downgrading its growth forecasts for the near term. Growth data out of Europe’s economic powerhouses such as Germany and France has been weaker-than-expected and analysts expect the ECB to remain dovish for an extended period.

Traders believe Europe’s slowdown and a dovish ECB are priced into the euro, which has traded in a $1.12-$1.16 range over the last three months.

Sterling <GBP=> was up modestly, holding above the key psychological level of $1.32. The cable gained 2.5 percent last week after a report in the Sun newspaper that Northern Ireland’s Democratic Unionist Party had privately decided to offer conditional backing for British Prime Minister Theresa May’s Brexit deal this week.

However, Ireland’s Deputy Prime Minister Simon Coveney said on Sunday the backstop was already a compromise drawn up to meet May’s negotiating red lines, and the EU and Ireland were united in the view it “was not going to change”.

Analyst expect the sterling to remain volatile. Britain is set to leave the European Union on March 29, but the country’s members of parliament remain far from agreeing a divorce deal.

The Australian dollar <AUD=> was unchanged at $0.7181 in muted trade as Australian markets were shut for a public holiday.

(Reporting by Vatsal Srivastava; Editing by Shri Navaratnam)

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