Dollar Edges Higher Before Fed Decision

LONDON (Reuters) -
The dollar is near a seven-week high against the Japanese yen, in advance of a Federal Reserve meeting where interest rates may be cut by a quarter of a percentage point.

The dollar held near a seven-week high against the Japanese yen on Wednesday before the outcome of a Federal Reserve meeting where officials are widely expected to cut interest rates by a quarter of a percentage point.

Against the yen, the dollar edged up 0.1% to 108.23 yen, just below a seven-week high of 108.37 yen tested overnight Tuesday. The dollar index against a basket of other currencies crept 0.2% up to 98.43.

With recent economic data proving to be strong – a Citigroup U.S. economic surprise index is holding at its highest levels this year – some market participants are buying the dollar in case the Fed signals a more confident view.

“All in, we think the meeting outcome risks disappointing market expectations, which are perhaps leaning towards a more dovish outcome, resulting in a renewed bid for the dollar,” Scotiabank strategists said.

The dollar has been driven more by trade tensions between Washington and Beijing this year than by U.S. monetary policy. The dollar has gained nearly 1% against the yen since the last rate cut in July.

Morgan Stanley strategists believe that any dollar upside is likely to be capped, because market expectations are not overly dovish and a trade deal between the United States and China seems likely.

A retreat in global oil prices also restored some calm to markets. Oil prices fell in Asia, extending Tuesday’s 6% decline, after Saudi Arabia’s energy minister said the kingdom had tapped stockpiles to restore oil supplies to where they stood before weekend attacks shut around 5% of global output.

The euro edged 0.2% lower at $1.1049, about 1% above the $1.0927 it reached last week, the lowest in more than two years.

After the Fed releases its policy decision, attention will turn to the Bank of Japan’s meeting ending on Thursday, to see whether it eases policy, too.

Deepening negative rates will be an option if the Bank of Japan eases policy, although the central bank may accompany that with measures to mitigate the pain on financial institutions, say sources.