The dollar held near a one-month high on Wednesday as currency desks waited on the Federal Reserve, with markets pricing about a 36% probability of a 25-basis-point hike. The euro edged up to around $1.139, while ING argued that a Fed hold could push the dollar lower alongside oil prices.
The U.S. dollar strengthened on Wednesday, holding near a one-month high as investors awaited the Federal Reserve's interest-rate decision, with some analysts expecting policymakers to deliver a surprise rate hike. The Dollar Index hovered around 101.20, down 0.06%, close to its highest level in four weeks as desks braced for the conclusion of the Fed's two-day policy meeting later in the day.
Trading across major currency pairs was rangebound and cautious. The euro edged slightly higher to trade around $1.139 after bouncing off a one-month low in the previous session. Sterling was similarly subdued, hovering near its lowest levels since early July ahead of the Bank of England's rate decision later in the week.
Oil keeps the inflation question open
The dollar's underlying strength comes as renewed hostilities in the Middle East lifted oil prices after joint U.S. and Saudi airstrikes targeted Iran-backed groups in Iraq, hours after the U.S. military said it had thwarted a surprise Iranian attack on American troops in the region. Those strikes and subsequent Iranian missile launches sent crude prices jumping over 3%, threatening to reignite energy-driven inflation.
Despite the geopolitical tensions, currency markets remained largely subdued as investors stayed on the sidelines before the decision, with markets pricing in about a 36% probability of a 25-basis-point rate hike.
Positioning cuts both ways
Investors are split on whether Fed Chair Kevin Warsh will endorse the dollar's recent gains, having built up long dollar positions on the view that costlier oil could keep inflation elevated, according to Philip Wee, senior FX strategist at DBS. Wee also flagged the risk that those bets unwind should the Fed's message fall short of hawkish or omit a signal of another increase in September.
ING approaches the same risk from the other direction, arguing the dollar could face downward pressure and track oil prices lower if the Fed keeps rates unchanged. The Bloomberg dollar gauge traded down less than 0.1% on Wednesday, a fourth session of minimal movement despite recent volatility in oil prices.
Meanwhile, the 60-day rolling correlation between the Bloomberg Dollar Spot Index and Brent crude futures dropped to its lowest level since late March. According to ING strategist Francesco Pesole: "That resilience will be tested heavily today".
Traders have grown bullish on the dollar this year, becoming the most upbeat on the US currency since 2015 according to Commodity Futures Trading Commission data. Markets are fully pricing in a rate hike in September.
Focus across European foreign exchange desks will pivot quickly after the Fed decision, with both the Bank of England and the Bank of Japan scheduled to deliver policy updates later in the week.
Sources: Investing.com, Investing.com
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