FX Roundup: Dollar rises as Fed begins interest rate deliberations

The dollar rose against a basket of global currencies on Tuesday, as the US Federal Reserve began its two-day policy meeting where it is tipped to raise interest rates by 25 basis points.

At 1540 GMT, the dollar was up against the yen by 0.40% changing hands at JPY121.51. Meanwhile, the pound fell against the greenback to exchange at $1.5097 down by 0.30%, while the euro fell 0.47% versus the greenback to change hands at $1.0940.

Jane Foley, senior FX strategist at Rabobank, said, “A more confident tone from the Fed on the outlook for both the US economy would likely chase EUR/USD lower particularly if Chairwoman Janet Yellen manages to hike US rates without sparking a sell-off in risk assets.

“If risk assets are spooked by the Fed tomorrow, however, downside potential for EUR/USD could prove to be limited.”

Commodity linked currency crosses also headed lower with the Australian dollar down 0.69% against its US counterpart exchanging at US$0.7192. Meanwhile, the New Zealand dollar was broadly flat to change hands at US$0.6763. The greenback also rose 0.03% against the Canadian dollar exchanging at CAD$1.3736.

Kit Juckes, head of forex at Societe Generale, said, “Outside the forex market, the big risk comes from the weight of positions in spread product in fixed income and in emerging market assets, still. Longer-term flows of capital out of risk assets would usually be dollar-supportive but in the FX market, the big net position is still, clearly, long US dollars.

“Perhaps the combination of risk reduction and shedding of dollar longs built up ahead of the start of the rate hiking cycle is what has driven the dollar down relative to the yen after previous hikes. What is clear today though, is that the short-term pre-FOMC risk is of a break higher in EUR/USD for no better reason than positions reduction, and of USD/JPY drifting lower at the same time.”

Finally, in Latin America, the dollar also traded higher against the Colombian (up 0.84%), Chilean (up 0.31%), and Mexican (down 0.96%) pesos.