Dollar on edge before Fed meet, all eyes on policy outlook
(Reuters) – The dollar was fragile in Asian trade on Tuesday as markets speculated growth worries will prompt the Federal Reserve to signal a pause to its monetary tightening cycle at this week’s meeting.
Asian equities were hit hard after a rout on Wall Street overnight following a drum roll of weak data globally, reinforcing bets the Fed’s widely expected rate hike on Wednesday would usher in a slowdown, or even a pause, to three years of steady rate increases.
“We are expecting a dovish hike by the Fed. The data has not been tepid enough for the central bank not to hike in December,” said Rodrigo Catril, senior currency strategist at NAB.
Senior Fed officials, including Fed Chairman Jerome Powell, have recently become more cautious about the policy outlook that underlined a shift in market sentiment from a few months ago on rising signs of a slackening in the global economy.
While the U.S. central bank’s latest median dot plot projections from September indicated its willingness to raise rates three times in 2019, the interest rate futures market is pricing in only one more rate hike for 2019.
This mismatch largely reflects a belief that higher U.S. borrowing costs will likely hurt U.S. growth and ultimately force the Fed to hit the pause button on its monetary tightenings.
The U.S. economy, which has been growing strongly this year, has started to show signs of fatigue, adding to growing evidence elsewhere including in Europe and China of cooling momentum.
Yet it may not be all gloom for the greenback. Some analysts think dollar strength can return if the Fed remains relatively confident about next year’s monetary tightening path.
“Most investors expect the central bank to be less hawkish so if the Fed makes it clear that further rate hikes are needed and there’s still scope for 3 rounds of tightening, the dollar will soar regardless of Powell’s concerns about the economy,” said Kathy Lien, managing director of currency strategy in a note.
The dollar index (DXY) was marginally lower at 97.08 after losing 0.4 percent on Monday.
In a tweet overnight, U.S. President Donald Trump took another swipe at the Fed’s expected rate increase this week, saying it was ‘incredible’ for the central bank to even consider tightening given the global economic and political uncertainties. The markets, however, looked past Trump’s now-familiar comments on the Fed.
The yen gained about 0.3 percent on the dollar as investors’ fears of slowing global growth increased demand for safety assets. The Swiss franc , another safe haven, also tacked on 0.1 percent.
“The Japanese yen and Swiss franc are likely to take on the mantle of safe havens from the greenback for the time being,” NAB’s Catril said.
Yen traders are also focusing on the Bank of Japan’s meeting on Dec. 19-20, at which it is widely expected to keep policy ultra-loose as inflation remains well below its target.
The euro (EUR=) was up marginally at $1.1350, having recovered all of its losses from Monday when it was hit by weak euro zone data.
Sterling , which has been heavily sold off in the past few months on Brexit uncertainty, held steady at $1.2622.
Commodity currencies such as the Canadian dollar and Norwegian crown were under pressure as oil prices tumbled overnight on signs of oversupply in the United States and on demand concerns stoked by the slowing global economy.
The Canadian dollar was fetching $1.3413 on the U.S. currency, down 0.06 percent.
The kiwi , on the other hand, firmed to $0.6845, buoyed in part by improved business confidence data.
An ANZ bank survey showed that firms turned a lot less pessimistic on the economy in December, while becoming more upbeat on their own prospects.
The kiwi had fallen sharply on Friday after the Reserve Bank of New Zealand (RBNZ) said it was considering almost doubling the required capital banks would need to hold in order to better safeguard financial system resilience.
ECONOMIC CALENDAR EVENTS FOR DECEMBER 18th
NZD ANZ Activity Outlook (Dec)
NZD ANZ Business Confidence (Dec)
AUD RBA Meeting’s Minutes REPORT
AUD HIA New Home Sales (MoM)
CHF SECO Economic Forecasts REPORT
USD Building Permits Change (Nov)
USD Housing Starts Change (Nov)
USD Housing Starts (MoM) (Nov)
USD Building Permits (MoM) (Nov)
CAD Manufacturing Shipments (MoM) (Oct)
USD Redbook index (YoY) (Dec 14)
USD Redbook index (MoM) (Dec 14)
NZD GDT Price Index
USD API Weekly Crude Oil Stock (Dec 14)
NZD Current Account – GDP Ratio (Q3)
NZD Current Account (QoQ) (Q3)
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