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FOREX-Dollar dips before Fed rate decision
December 14, 2016 / 12:01 PM / 9 months ago

FOREX-Dollar dips before Fed rate decision

(Updates prices, adds Goldman call on Fed)

* Dollar index off its Monday peak ahead of Fed meeting

* Markets expect Fed to raise rates twice in 2017

* Euro, yen both steadier so far in December

* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh

By Patrick Graham

LONDON, Dec 14 (Reuters) - The dollar inched down on Wednesday in the run-in to the Federal Reserve’s policy statement later in the day, with an almost 1 percent fall this week showing minimal expectations the Fed will ramp up its forecasts for future rises in interest rates.

The Fed is seen as all but certain to raise its main rate by a quarter point to 0.50-0.75 percent. It will be Chair Janet Yellen’s tone, and new forecasts for future rates, that will drive the market response.

Talk among traders this week has focused on the risks of policymakers expressing concern at the dollar’s gains or alternatively ramping up the predicted pace of future rate hikes in response to President-elect Donald Trump’s spending plans.

The dollar was just over 0.1 percent down against a basket of currencies in midday trade in Europe. The euro inched up to $1.0645 and the yen rose 0.2 percent to 114.93 to the dollar.

“Last year’s template was for dollar long positions to be pared into the (rate rise) event,” said Jeremy Stretch, head of currency strategy with CIBC in London.

“This time it has been slower but overall I think we are seeing some lightening of positions. If you have been riding the dollar rally, it makes sense to take some money off the table and come back once the dust has settled.”

The major investment banks are mainly upbeat on the dollar’s prospects for next year after a bullish month following Trump’s election. Higher inflation expectations have encouraged more bullish forecasts for U.S. rates next year, and Fed policymakers may play into that by raising their own predictions.

But the pullback this week points to doubts on any push past parity with the euro. Investors also seem more nervous about further weakening the market’s safe haven of choice, the yen, given a raft of political risks to global growth next year.

“Medium to long-term dollar strength is likely but it must not happen too quickly,” analysts from Germany’s Commerzbank said in a note to clients. “Euro-dollar parity over the next couple of months for example would be too much.”

Goldman Sachs strategists called for the dollar to rise after the decision

“For us as dollar bulls, it is not whether the Fed hikes or not at a given meeting that matters, but rather what kind of overall hiking cycle it communicates,” they said in a note.

“Given that some kind of fiscal stimulus is likely, we think market pricing should be somewhere between two and three hikes for next year, not between (currently priced) one and two.” (Editing by Mark Trevelyan)

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