Dollar slips ahead of widely expected Fed rate hike

NEW YORK (Reuters) - The dollar was slightly weaker on Tuesday ahead of a Federal Reserve meeting that is widely expected to end with an interest rate hike, as investors already have priced in two more rate increases this year and some in 2019, leaving little room for further currency gains.

FILE PHOTO: An Austrian central bank official displays new 100 euro banknotes in Vienna, Austria, September 17, 2018. REUTERS/Heinz-Peter Bader/File Photo

The Fed kicked off its two-day meeting, with market participants focussed on the U.S. central bank’s view on the economy as well as its guidance on future tightening. The Fed already has raised rates twice in 2018.

The dollar has benefited from a hawkish rate outlook all year, but has lost steam the last few weeks, as other economies such as the euro zone improved, keeping them closer to a shift to tighter monetary policy.

Since mid-August, the dollar has declined 3.1 percent against a basket of currencies.

“As a rate increase is highly likely and therefore priced in, the reaction of the dollar will be influenced to a large degree by the Fed’s forward guidance and whether there are any noticeable changes in the ‘dot-plots’,” said Fawad Razaqzada, market analyst at in London.

Fed officials’ median projection on the number of rate increases is commonly referred to as its dot-plot.

In afternoon trading, the dollar index was down 0.1 percent at 94.120.

John Lynch, chief investment strategist at LPL Financial in Charlotte, expects the Fed to maintain a flexible policy on Wednesday that remains data dependent.

“Any change in the Fed’s view of inflation could roil markets,” Lynch said. “But we believe recent readings will allow the Fed to continue to view inflationary risks as balanced, leaving room for it to continue to hike rates gradually with a potential slowdown in the pace as we approach the neutral rate.”

The euro, on the other hand, rose despite a European Central Bank official downplaying on Tuesday its President Mario Draghi’s comments a day earlier about “relatively vigorous” inflation.

Some analysts said the euro was also supported by signs Italy’s anti-establishment coalition is likely to reach a compromise over its 2019 budget.

The euro was last up 0.2 percent at $1.1771 . It had touched a 3-1/2 month high on Monday after Draghi expressed confidence in euro zone inflation and wage growth.

But the ECB’s chief economist Peter Praet said on Tuesday there was nothing new in Draghi’s comments. The single currency, however, managed to find strength.

Against the yen, the dollar was up 0.1 percent at 112.92 yen after minutes from the Bank of Japan’s July policy meeting showed a few board members said the BoJ must consider more seriously the potential dangers of ultra-easy policy.

Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci and Lisa Shumaker