Dollar gains as Treasury yields rise before Fed; yen drops
Credit: Reuters/Leonhard Foeger
1 of 3. Two Euro coins are seen after being minted in the Austrian Mint (Muenze Oesterreich) headquarters in Vienna June 20, 2013.
The dollar's index stood at 80.02 .DXY, having slipped from Monday's high of 80.419, with immediate support seen at the December 11 low of 79.757.
Although a steady run of firm U.S. economic data in recent weeks has raised speculation that the Fed could reduce its bond buying at its policy meeting ending on Wednesday, a majority of investors still think stimulus-tapering will happen early next year.
'Considering that share market fell after the end of QE1 and QE2, there's a chance we could see similar negative impact,' said Shin Kadota, chief FX strategist at Barclays, referring to the Fed's previous episodes of transitioning from one asset-purchase phase to the next.
Many market players expect the Fed will trim its monthly $85 billion bond-buying program by $10-15 billion at most when it eventually chooses to do so.
In reality, the Fed's choice is not just about the amount of reduction in bond buying, with some traders also expecting the central bank to reinforce its message that interest rates will stay low for an extended period to counter any negative effect of tapering.
Still, a no-taper decision on Wednesday is expected to dent the dollar, although it may hold its own against the yen, which tends to get hit when risk appetite rises.
The Fed will announce its policy decision at 1900 GMT and Chairman Ben Bernanke will hold a news conference at 1930 GMT.
In early Asia, the euro traded at $1.3772, maintaining its slow uptrend from Friday's low of $1.37085, though many market players were cautious as the common currency pushed closer to the two-year high of $1.3833 hit in October.
The euro has been helped by European banks' repatriation of funds to shore up their capital bases before the European Central Bank's asset review as well as rise in euro zone interest rates in the past few weeks.
The rise in euro zone rates reflects both seasonal tightening in money markets ahead of the year-end as well as diminishing expectations that the ECB will adopt negative interest rates.
The dollar also eased against the yen to 102.57 yen, little changed in early Asian trade but down from a five-year high of 103.925 yen reached on Friday.
Sterling lost some of its recent momentum, wobbling near three-week lows against the dollar and a six-week low versus the euro, after benign UK inflation data dampened speculation about early rate hikes.
The pound traded at $1.6272, after having slipped to $1.6214 on Tuesday from a two-year high of $1.6499 hit last Wednesday.
The euro rose to 84.67 pence on Tuesday, its highest level since early November and last stood at 84.64.
The Australian dollar slumped to a fresh four-month low of $0.8882 overnight after the Australian central bank repeated its recent message that the currency was uncomfortably high.
It was a touch up in early Asian trade at $0.8912, though the pressure on the Aussie from the central bank doesn't look like it will abate anytime soon.
The Reserve Bank of Australia Governor Glenn Stevens said earlier on Wednesday that an Aussie above $0.90 is not suitable for the economy.
In a rare media interview on Friday, Stevens said he thought $0.85 was a more reasonable level than $0.95.
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