Dollar up as investors brace for volatile markets; Fed meeting

LONDON - 28 January 2018: The euro edged down on Monday as investors bought the dollar and prepared for volatile markets ahead of U.S.-China trade talks and a Federal Reserve policy decision.

Investors are focused on Wednesday’s Fed meeting when policymakers are expected to signal a pause in their tightening cycle and to acknowledge growing risks to the U.S. economy.

That will likely weigh on the greenback, which has fallen 1 percent since late December, after enjoying a boost from the Fed’s four rate increases in 2018.

On Monday, however, the dollar was buoyed by safe-haven buying as traders anxiously await news from U.S.-China talks on Tuesday and Wednesday to see if the world’s largest economies can reach a compromise on trade.

“Unless there is a breakdown in negotiations, we suspect the cautiously risk positive environment can continue - which should favour higher-yielding under-valued emerging market currencies against the dollar,” said Chris Turner, head of foreign exchange strategy at ING in London.

The dollar index, a gauge of its value versus six major peers was marginally higher at 95.896, after falling 0.8 percent on Friday.

A deal last week to reopen the U.S. government for now after a prolonged shutdown reduced investor demand for the safety of the greenback.

“The general direction for the dollar is still down and markets will be taking cues from the FOMC this week,” said Sim Moh Siong, currency strategist at Bank of Singapore.

“The Fed will most likely keep rates steady this year given the state of economic growth outside the U.S.”

The dollar fell 0.1 percent versus the offshore yuan to 6.7406. The rally in the yuan also fuelled a bounce in the Australian dollar, which gained 0.18 percent versus the dollar to $0.7195.

Traders are bearish on the dollar for 2019.

The euro was marginally weaker on Monday at $1.14.

The single currency managed to cling on to a 0.4 percent gain made last week despite the European Central Bank downgrading its growth forecasts for the near term.

Growth data out of Europe’s economic powerhouses such as Germany and France has been weaker-than-expected and analysts expect the ECB to remain dovish for an extended period.

Traders believe Europe’s slowdown and a dovish ECB are priced into the euro, which has traded in a $1.12-$1.16 range over the last three months.

Sterling drifted lower on Monday after posting its biggest weekly rise in more than 15 months last week as investors consolidated positions before a series of votes in the British parliament on Tuesday that will aim to break a Brexit deadlock.

Analysts expect sterling to remain volatile. Britain is set to leave the European Union on March 29, but the country’s members of parliament remain far from agreeing a divorce deal.