Dollar under pressure as Fed takes centerstage

By Ian Chua

SYDNEY (BestGrowthStock) – The U.S. dollar stayed on the backfoot early in Asia on Wednesday, with the euro holding above $1.4000 and the Aussie just off parity as the Federal Reserve looked set to provide more stimulus to spur a flagging recovery.

Due at around 2:15 p.m. EDT, the Fed is expected to announce plans to buy hundreds of billions of dollars in U.S. government debt in order to foster a stronger economic recovery.

Markets are generally priced for the Fed to initially commit to buying at least $500 billion in Treasuries over five months, although much uncertainty surrounds the scope and pace of bond purchases.

A bigger-than-expected stimulus could further weigh on the dollar, while a smaller program could help the embattled greenback stage a rebound.

“I think they’ll take the approach that central banks usually take for interest rates, which is to make a small change now and reconsider at the next meeting,” said Joseph Capurso, currency strategist at Commonwealth Bank in Sydney.

“The market is going to be surprised and the U.S. dollar is going to have a strong across-the-board rally. The market has a lot priced in now and that’s keeping the dollar weak.”

Trading in Asia is expected to be subdued with Japanese markets shut for a holiday and in the lead up to the Fed’s decision.

“Investors and clients have pretty much got the positions that they need, and as a result, they’re not going to do a lot until the Fed outcome,” said Philip Burke, a chief currency trader at JPMorgan.

Markets were also keeping an eye on the results of U.S. mid-term elections on Tuesday. Some analysts said a Republican victory could be positive for the U.S. currency on market hopes for increased fiscal austerity and less government regulation.

Having breached resistance around the $1.4000 area overnight, the euro last traded at $1.4031 versus $1.4038 late in New York, with immediate resistance seen at the overnight high of $1.4058.

Against the Japanese currency, the euro bought 113.14 yen compared with 113.29 in New York, while the dollar fetched 80.61, little changed from 80.68 yen.

The Australian dollar was at $0.9988, having hit a 28-year high of $1.0025 after a surprise interest rate hike by the Reserve Bank of Australia on Tuesday.

The RBA lifted the cash rate by 25 basis points to 4.75 percent and left the door open for more, delivering a pre-emptive strike against inflation.

“Our view is that there will probably be two more rate hikes in this tightening phase, dependent to some degree on what the banks pass through,” said Stephen Roberts, chief economist at Nomura.

Dollar under pressure as Fed takes centerstage