FOREX-Dollar inches up before Fed verdict; eyes on Yellen debut

Wed Mar 19, 2014 7:59am EDT

Related Topics

* Dollar rises against yen and euro before Fed decision

* Fed expected to continue tapering its bond-buying stimulus

* Focus on UK annual budget, sterling recovers vs dollar (Updates levels, adds Canadian dollar's drop, fresh comments)

By Anirban Nag

LONDON, March 19 (Reuters) - The dollar rose against the yen and euro on Wednesday, buoyed by expectations the Federal Reserve will look beyond the impact on the U.S. economy of a harsh winter and further unwind its monetary stimulus.

Some trepidation before Janet Yellen's inaugural policy review as Federal Reserve chief limited gains, traders said.

The Fed is widely expected to reduce its monthly bond purchase programme by a further $10 billion at the end of its two-day meeting. Yellen, widely regarded as a dove, is due to address a news conference later in the day.

Many in markets expect the Fed to amend its forward guidance on policy, assuring investors that interest rate hikes remain distant despite unemployment easing faster than expected.

The dollar edged up 0.15 percent to 101.60 yen, staying above a one-month low of 101.20 yen hit on March 3. The euro fetched $1.3920, down 0.1 percent on the day but not far from last Thursday's 2-1/2-year high of $1.3967.

"The key thing will be whether there will be any change in the timing of rate hikes by the Fed from next year," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

"I am not convinced the Fed is ready to materially change guidance and we will see a very even-handed Yellen. All of which leaves investors looking to second-quarter U.S. data before taking fresh positions in the dollar."

The Fed has said it will not raise rates until joblessness falls to at least 6.5 percent, a pledge policymakers thought would hold until at least mid-2015. But it hit a five-year low of 6.6 percent in January, before rising to 6.7 percent in February.

Expectations Yellen will pursue a broadly dovish stance have helped rein in U.S. Treasury yields and this, in turn, has undermined the attraction of the dollar for investors.

The U.S. dollar, though, hit its highest in a month against the Canadian dollar at C$1.1190. Selling in the currency gathered pace after Bank of Canada Governor Stephen Poloz said on Tuesday Canada could face a prolonged period of sluggish growth and lower interest rates.

FOCUS ON STERLING

Sterling rose 0.2 percent to $1.6644, rebounding from a one-month low struck on Tuesday and helped by data showed wages ticking higher and a steadily improving jobs market.

The number of Britons claiming jobless benefits fell more than expected while wages rose 1.4 percent year-on-year, which though higher than forecast was still below inflation.

Finance minister George Osborne, due to present the UK annual budget later on Wednesday, is expected to stick to his plan to fix the public finances. This will keep the onus on the Bank of England to keep monetary policy loose to ensure growth.

"In order to keep the pressure on the budget deficit, a continuation of austerity can be expected from the government," said Jane Foley, senior currency strategist at Rabobank.

"However, with the election a little over a year away, some crowd pleasers are also likely and this could lend the pound some support."

And while the safe-haven yen lost ground, investors remained cautious over tensions in Ukraine. Anxiety eased somewhat after Russian President Vladimir Putin said on Tuesday he did not plan to seize other regions of Ukraine, a day after Crimean citizens voted to be annexed by Moscow. (Editing by Nigel Stephenson)

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