NEW YORK (Reuters) - The dollar rose on Wednesday and was trading near a seven-week high against the yen, ahead of a Federal Reserve policy meeting where officials are widely expected to cut interest rates by a quarter of a percentage point.
Many investors, however, were pricing in less aggressive action from the Fed going forward as inflationary pressures and wage growth have been steady, even as pockets of the U.S. economy, such as the service sector, have shown steady improvement.
“The Fed is likely to deliver a hawkish cut, reflecting a mix of positioning and expectations,” said Mark McCormick, global head of FX strategy, at TD Securities in New York. “The Fed will leave room to do more...and the dots are unlikely to offer a crystal clear path to steeper cuts down the road.”
Fed officials’ median projection on the number of rate moves is commonly referred to as its “dot-plot.”
In morning trading, the dollar edged up 0.1% to 108.18 yen, just below a seven-week high of 108.37 yen tested overnight. The dollar index, tracking the unit against a basket of other currencies, rose 0.1% to 98.352.
Graphic: Dollar positions, here
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, analysts said. The dollar has gained nearly 1% against the yen since the last rate cut in July.
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 slipped 0.1% to $1.1056, still higher than the $1.0927 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 BOJ eases, although the central bank may accompany that with measures to mitigate the pain on financial institutions, sources have told Reuters.
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saikat Chatterjee in London; Editing by Bernadette Baum