The dollar edged higher in early European trading Tuesday, amid cautious trading with the focus very much on the Federal Reserve in a week dominated by central bank meetings.
At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.1% at 91.927.USD/JPY was up 0.1% at 109.22, after rising to a nine-month high of 109.36 on Monday and ahead of the Bank of Japan’s two-day policy meeting starting Thursday.
EUR/USD fell 0.1% to 1.1919, while GBP/USD fell 0.5% to 1.3831, ahead of a Bank of England meeting on Thursday on a combination of rising inflation expectations and confidence that the Bank of England will keep its policy unchanged at its meeting on Thursday. The risk-sensitive AUD/USD dropped 0.3% to 0.7736.
The main focus will be on the Federal Reserve this week, as it begins its two-day policy meeting later Tuesday.
While the U.S. central bank is not expected to make any changes to its current monetary policy, what Chairman Jerome Powell has to say about the run-up in bond yields will be keenly studied amid concerns that economic growth and rising inflation could prompt a faster-than-expected normalisation of monetary policy.
“A largely unchanged FOMC statement and a Jay Powell press conference repeating that the Fed has a long way to go before reducing stimulus should prevent the dollar running too far ahead,” said analysts at ING, in a research note.
The market is also waiting for a decision on the supplemental leverage ratio exemption, a move that allows big banks to exclude reserve deposits and Treasury holdings from their capital ratio calculations. This is due to expire at the end of this month.
“Failing to extend it would be a big surprise, hit Treasuries and also hit equities on the view that U.S. banks would have to raise more equity capital,” ING added.Away from the Fed, Norway’s central bank is likely to keep its key policy rate unchanged when it meets on Thursday, but the upturn in inflationary pressures will make for increasingly difficult decisions for Turkey’s central bank, also on Thursday, and Russia’s on Friday.