NEW YORK (Reuters) - The dollar slipped against the euro and yen on Tuesday, trading in narrow ranges as investors awaited an announcement from the Federal Reserve on the central bank’s stimulus program.
As the Fed begins its two-day policy meeting on Tuesday, market participants generally expect no major policy changes, though the U.S. central bank could begin to lay the groundwork for a reduction in its economic stimulus that many say could occur in the first quarter of the new year.
“I would be surprised if they actually move to taper asset purchases - and think only a small minority are looking for a taper (on Wednesday), but I see a strong likelihood that this will be a set-up meeting for a move in January,” said John Hardy, head of FX strategy at Saxo Bank in London.
The euro gained 0.1 percent to $1.3768, partly helped by an upbeat German sentiment survey.
The common currency touched a six-week high against the dollar last week, buoyed by higher money market rates.
Another factor driving euro strength this year has been European banks repatriation of funds to shore up their respective capital bases before an ECB Asset Quality Review. EU banks reduced their assets by 817 billion euros ($1.12 trillion) between December 2011 and June 2013, according to the European Banking Authority.
Against the yen, the dollar was down for a third straight session, falling 0.4 percent to 102.60.
After slipping 0.1 percent in October, data on Tuesday showed the U.S. consumer price index was restrained last month by declines in energy prices. In the 12 months through November, the CPI rose just 1.2 percent. It had increased 1.0 percent in the 12 months to October - the smallest monthly advance since October 2009.
Brian Dangerfield, a currency strategist at RBS Securities in Stamford, Connecticut, said Tuesday’s benign inflation data “justifies the Fed’s accommodative stance,” and has made the prospect of tapering this week less likely.
The chances of the Fed starting to taper its huge bond-buying program this month or next have increased after a run of upbeat data, including strong November industrial production, although a majority of economists polled by Reuters still expect the change to come in March.
The dollar index .DXY, which measures the greenback against a basket of six currencies, was down slightly at 80.036. It is down about 0.7 percent over the last three weeks.
The Australian dollar fell to a 4-1/2-month low of $0.8879 following the release of the minutes of the Reserve Bank of Australia’s December 3 policy meeting. The RBA said the Aussie is still uncomfortably high despite the fact it has weakened noticeably over the past month.
Australia’s government has also abandoned any intentions of returning to a budget surplus and predicted deficits for the next decade without spending cuts.
The Australian dollar last traded 0.54 percent lower at $0.8899.
In Sweden, the Riksbank cut the repo rate as widely expected. In reaction following the widely-telegraphed move, the euro slipped 0.3 percent against the Swedish currency to 9.0272 crowns. Some investors are now betting the crown’s weakness is largely over.
Additional reporting by Gertrude Chavez-Dreyfuss; editing by G Crosse