* Fed likely to reduce stimulus, sound dovish
* Currencies trade in tight ranges before Fed
NEW YORK, Sept 18 The U.S. dollar was little
change against the euro and lower against the yen as investors
placed their last bets before any decision by the Federal
Reserve to trim its stimulus program.
The Fed's highly anticipated two-day meeting ends later in
the day and markets expect the central bank will announce a
slight reduction to its $85 billion monthly bond-buying program
while stressing that interest rates will stay low for a while.
Indeed, since a disappointing U.S. non-farm payrolls report
on September 6, markets have scaled back expectations on the
size of any pullback in stimulus.
Traders said currencies would stay in tight ranges as
investors were unwilling to take fresh positions before the
outcome of the Fed's policy review due at 2 PM ET (1800 GMT).
Chairman Ben Bernanke will hold a news conference one half hour
"From the FX perspective, the start of tapering has already
been discounted," said Ken Dickson, investment director of
currencies at Standard Life Investments in Edinburgh with $271.2
billion in assets under management from New York. "There is a
risk of volatility if the Fed doesn't taper."
"It is not a good idea for any central bank to settle on
something and then pull it off course," Dickson added.
The euro held steady at about $1.3351, hovering near
a 2-1/2 week peak of $1.3385 reached on Monday.
The dollar was down 0.1 percent at 99.00 yen. A
reported large options expiry at 99.00 yen could keep the pair
close to that level.
The dollar index was down little changed at 81.13,
close to Monday's four-week low of 80.968.
"We expect the Fed to taper by $10 billion and some in the
market are pushing for $15 billion. I think they are also going
to try and push the message that rates aren't going to go up
anytime soon," said Paul Bednarczyk, head of research at 4CAST.
He added that if the amount were less than $15 billion, then
the dollar could be dragged lower.
Some analysts said there was a chance the Fed might pledge
to keep rates low until the jobless rate falls to around 6.0
Benchmark U.S. 10-year Treasury yields were also
lower at around 2.86 percent, below the 3.007 percent touched on
September 6, which was a more than two-year high.
In the options market, near-term implied volatility rose
ahead of the Fed meeting. Demand to hedge against excessive
price moves tends to rise during market uncertainty.
Overnight euro/dollar implied volatility spiked
to a one-and-a-half month high of around 14.35 from around 5.15
on Sept. 17.
Traders said any delay to the tapering may be seen as dovish
by markets and could prompt investors to sell the dollar.
Conversely a bigger reduction of stimulus could be seen as
hawkish, lifting demand for the greenback.
Analysts at Morgan Stanley expect the euro to rise against
the dollar in the near-term, adding a move above the September
16 high of $1.3385 could open the way towards $1.3455 initially
and then the $1.3600 area.
But they warned of the risks ahead for the single currency.
"We continue to highlight the risk factors for the euro on
the horizon, including the German elections on Sunday, where the
outcome is becoming increasingly difficult to call."
Chancellor Angela Merkel is widely expected to win the
election but a poll on Wednesday showed her center-right
coalition could fall short of a majority.