FX Roundup: Dollar drops ahead of Fed decision

The dollar headed lower against the euro and a basket of commodity linked currencies on Wednesday, ahead of the conclusion of the US Federal Reserve’s monetary policy meeting.

Last month, the Fed decided to raise interest rates for the first time in nearly a decade by 25 basis points. While the central bank's Federal Open Market Committee is expected to keep rates unchanged at 0.50%, investors will be looking closely at the accompanying statement for clues on the timing of the next hike.

At 1541 GMT, the euro was up 0.06% against the greenback exchanging at $1.0872, while the pound was down 0.69% exchanging at $1.4251.

Kit Juckes, head of forex at Societe Generale, said, “The FOMC statement will be the highlight of the session. The statement is bound to reflect the softer economic data, tighter financial conditions, global environment and the 2% gain in the dollar's trade-weighted index since the last meeting.

"How does a slightly dovish statement, thrown at a market expecting dovishness and buffeted around by news from China and by the oil price, affect FX? Not enormously, but given a 20-odd basis point drop in 1-year forward rate expectations since the last FOMC, I guess the market is now about as skewed towards the dovish side as it can get. So my bias is to stick with a bullish dollar bias at the margin.”

Commodity currencies had another decent session, as the greenback fell 0.30% against the Canadian dollar exchanging at CAD$1.4076. Concurrently, the Australian dollar rose 0.60% against the greenback exchanging at US$0.7047 and the New Zealand dollar rose 0.14% exchanging at US$0.6508.

Jane Foley, senior FX strategist at Rabobank, said, “We would expect the Reserve Bank of Australia to open the door monetary policy easing a little wider at next week’s meeting and maintain our preference for selling AUD/USD into rallies. Meanwhile, at its last policy meeting in December the Reserve Bank of New Zealand not only cut rates but made it very clear that policymakers would “reduce rates if circumstances warrant”.

"Since the start of the year the value of the New Zealand effective exchange has dropped. Despite market expectations clearly favouring a steady policy outcome from the RBNZ we see a good chance that the Bank may cut rates again this week. We continue to favour the downside in NZD/USD towards 0.64 on a three-month view."

Finally, in Latin America, the dollar rose against major regional crosses, including the Colombian (up 0.44%), Mexican (up 0.07%) pesos and Brazilian real (up 0.17%).