TOKYO (Reuters) - The dollar edged up against a basket of currencies in early trade on Monday, drawing mild support as geopolitical worries hung over the markets, but was by potentially decisive events such as the Federal Reserve meeting midweek.
The dollar index .DXY, a measure of the greenback’s strength versus key currencies, edged up 0.1 percent.
The index had gained about 0.3 percent the previous week, helped by factors including higher U.S. Treasury yields and its status as a safe haven as conflict in Iraq escalated.
In focus was whether the dollar can gain further should the Federal Reserve provide new hints on the timing of interest rate hikes when it concludes its two-day policy meeting on Wednesday.
Currently expectations are for the Fed to begin raising rates about a year from now, and the dollar is seen benefiting from any hawkish comments by the central bank.
“Key points are if Fed Chair (Janet) Yellen upgrades her view on the economic view in light of recent economic indicators and if the central bank raises its yield forecast, which would reignite expectations for earlier rate hikes,” said Junichi Ishikawa, market strategist at IG Securities in Tokyo.
“Whether geopolitical risks have any currency impact depends on how the situation in Iraq and Ukraine impacts the equity markets, but so far their reaction appears limited,” he said.
The euro traded little changed at $1.3537 EUR=, within sight of a four-month trough of $1.3503 hit earlier this month when the European Central Bank eased monetary policy.
Market participants expect the single currency to come under further pressure against the dollar should the Fed’s statements on Wednesday cause a further divergence in monetary policies between the ECB.
“We prefer staying short euro versus dollar as the Fed’s constructive view on the U.S. economy would come in contrast to the ECB’s cautious stance on euro area inflation,” strategists at Barclays wrote in a note to clients.
Sterling, which has been boosted recently by the hawkish approach taken by the Bank of England, was at $1.6976 GBP=D4, in close reach of $1.6995, highest since May 6.
BOE Governor Mark Carney had said on Thursday that interest rates could rise sooner than financial markets expect, in a surprisingly stark warning that monetary policy may start to tighten in less than a year.
The euro fell to as low as 79.68 pence EURGBP=D4, a trough not seen since November 2012.
The dollar dipped 0.1 percent to 101.95 yen JPY=, pulling back mildly as Tokyo shares slipped and dampened appetite for risk assets. The dollar has been caught in a relatively tight 102.80-101.60 range so far this month.
Editing by Eric Meijer