Currencies

U.S. dollar mixed as investors bide time before Fed meeting

Key Points
  • In midday trading, the dollar index, which tracks the U.S. currency against six peers, was flat at 90.912, after dipping to the lowest since March 3 overnight at 90.679.
  • The dollar added 0.4% to 108.50 yen, another haven currency, continuing its rise from the seven-week low of 107.48 reached Friday.
Yen, euro and U.S. dollar banknotes of various denominations.
Kiyoshi Ota | Bloomberg | Getty Images

The dollar was mixed against major peers on Tuesday, gaining against the yen and commodity currencies, with investors biding time ahead of a policy decision by the U.S. Federal Reserve on Wednesday.

The yen, on the other hand, hardly budged after the Bank of Japan kept its policy on hold.

The safe-haven greenback was largely out of favor for most weeks after world stocks started the week hitting a record high, although a pullback in global equities on Tuesday helped keep it above the recent lows.

Trading in currencies was largely subdued, ahead of the Fed's two-day meeting, which ends on Wednesday, where no change to policy is expected.

The market will pay close attention to comments from Fed Chairman Jerome Powell, who is likely to address concerns and questions about whether improving economic conditions warrant a withdrawal of monetary easing. Analysts, however, expect Powell to stick to the Fed's ultra-accommodative stance, which should weigh on Treasury yields and the dollar.

"The Fed is widely expected to maintain current policy settings on Wednesday, but traders are well aware that a hawkish shift - an acknowledgement of underlying economic strength - could trigger renewed dollar upside," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.

"If signs of optimism leak through in the official statement or during the press conference, investors are likely to bring tapering expectations forward and drive Treasury yields upward. Awareness of this risk is keeping traders parked in the dollar," Schamotta added.

In midday trading, the dollar index, which tracks the U.S. currency against six peers, was flat at 90.912, after dipping to the lowest since March 3 overnight at 90.679.

The dollar added 0.4% to 108.50 yen, another haven currency, continuing its rise from the seven-week low of 107.48 reached Friday.

The yen showed a muted response after the Bank of Japan kept its monetary policy on hold as widely expected.

"The reflation trade is back on," Gavin Friend, a strategist at National Australia Bank, said on a client podcast. "Currencies outside of the dollar should be doing quite well anyway in that environment."

The dollar has fallen nearly 3% since late March as U.S. Treasury yields traded in narrow ranges after retreating from a 14-month high of 1.7760%, slashing the currency's yield appeal.

The euro was slightly down at $1.2078, but not far from the two-month high of $1.2117 reached Monday.

The commodity-linked Australian dollar, a barometer of risk appetite, eased 0.4% to US$0.7771, after a 0.7% rally overnight that took it just shy of a five-week peak.

The offshore Chinese yuan retreated 0.1% to 6.4789, after rising to a seven-week top of 6.4710 per dollar on Monday.

In cryptocurrencies, bitcoin hit a high of $55,354.59, following a 10% surge on Monday, driven by reports that JPMorgan Chase is planning to offer a managed bitcoin fund.

That snapped a five-day losing streak that had taken the digital token to the cusp of $47,000, with losses accelerating amid worries about U.S. President Joe Biden's plan to raise capital gains taxes.