Dollar trapped as Fed meeting looms; RBA awaited

By Ian Chua

SYDNEY (BestGrowthStock) – The U.S. dollar kept a tenuous grip on overnight gains early in Asia on Tuesday, buoyed by surprisingly strong U.S. manufacturing data, but the upside is seen limited ahead of the Federal Reserve’s policy meeting.

The Fed is widely expected to announce on Wednesday a second round of monetary easing, with markets generally priced for the central bank to commit to buying at least $500 billion in Treasury debt over coming months to spur a flagging economy.

However, much uncertainty surrounds the scope and pace of bond purchases, leaving the dollar vulnerable to choppy moves in prevailing ranges.

Data on Monday showed surprisingly strong growth last month in the U.S. manufacturing sector, but it was probably too late to stop the Fed from more monetary easing.

Alan Ruskin, global head of G10 currency strategy at Deutsche Bank, said it would provide fuel for Fed hawks who are dubious about more easing and “will tend to add to expectations that the Fed will want maximum flexibility to turn off the printing press” should strong economic data warrant it.

The dollar was last at 80.51 yen, little changed from 80.58 yen late in New York. But it was within sight of a record low of 79.75 yen set in 1995.

Markets were keeping a wary eye on the currency pair, with the risk of Japanese intervention to weaken the yen expected to mount if the dollar slips below 80 yen.

Last week, the Bank of Japan said it would bring forward its mid-November meeting to this week.

“They did it to provide themselves with the opportunity to react to market movements after the FOMC. There is a very realistic possibility, and I think they know that, that dollar/yen will fall below the record low after the Fed meeting,” said Kathy Lien, director of currency research at GFT.

“I think their timing of the next BOJ meeting is done so that they could respond with QE as well as intervention, which actually would be very powerful.”

The euro, which again failed to convincingly break above $1.4000 overnight, retreated to $1.3900. Against the yen, it fetched 111.90 versus 111.79 late in New York.

The U.S. congressional election is due on Tuesday, although the outcome is unlikely to have any immediate impact on currencies, analysts said.

RBA EYED

In contrast to the Fed, the Australian central bank is deciding on whether to lift interest rates to dampen the risk of price pressures building up due in part to an export boom.

While official data showing tame inflation last week has prompted markets to give a slim 27 percent chance of a hike to the 4.5 percent cash rate on Tuesday, no one is seriously ruling out entirely the risk of a move.

Should the RBA raise rates and signal more tightening to come, the Australian dollar could retest parity against the greenback.

A decision to keep rates unchanged will probably see only limited declines for the Aussie, as attention turns to the risk of a rate hike at the December meeting.

“(The) AUD has proven bullet proof and strong Australian and Chinese PMIs suggest that dip-buying on ‘no move’ is what everyone wants to do,” said Kit Juckes, analyst at Societe Generale.

Dollar trapped as Fed meeting looms; RBA awaited