Dollar steady as traders await clarity on Fed rate hike path

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The U.S. was steady against a basket of major currencies on Tuesday on uncertainty over whether the U.S. Federal Reserve would signal a slow or fast pace of interest rate increases at the end of a closely-watched policy meeting.

The Fed is widely expected to hike interest rates on Wednesday. It is less clear, however, if the central bank will indicate a more cautious pace of rate increases given a recent surge in Treasury yields and gains in the dollar or a faster pace on greater confidence that U.S. economic growth will accelerate.

Expect the US dollar to consolidate after Fed hike: Expert

As of September, Fed officials' median projection was for two rate increases next year. A rate increase this week would be the first since last December and only the second since the 2007-2009 financial crisis.

"Understandably, the market is in a little bit of a holding pattern" ahead of the Fed's policy statement, said Richard Franulovich, a senior currency strategist at Westpac Banking Corp in New York.

Franulovich said the Fed could signal a "dovish hike," or a rate hike combined with a policy statement that alludes to recent strength in the dollar and higher U.S. yields as a potential constraint on growth, or a "hawkish hike" where the Fed raises rates and emphasizes faster growth.

The dollar index, which measures the greenback against a basket of six major currencies, rallied nearly 4 percent between the Nov. 8 U.S. presidential election and last Friday. Benchmark 10-year Treasury yields hit 2.528 percent on Monday, their highest level in more than two years.

Those moves have largely come about on expectations that U.S. President-elect Donald Trump will enact policies that increase spending and debt as well as spur growth and inflation.

"There is a lot of suspicion that the Fed might be more dovish than hawkish at this point, given the very strong run-up in rates," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

Managing strong dollar risks

The U.S. dollar index was last up 0.04 percent at 101.070. The dollar was up 0.15 percent against the at 115.19 yen after hitting a 10-month high of 116.12 yen on Monday.

The euro was last down against the dollar at $1.0621 after briefly touching a five-day high of $1.0666 in morning trading.