Dollar Retreats Against Euro Before Fed’s Rates Decision

The dollar fell against the euro before the Federal Reserve announces its policy decision and economic outlook as the central bank winds down monetary stimulus.

The ForexSQ Dollar Spot Index declined from a one-week high as Fed Chair Janet Yellen and policy makers weigh a report yesterday that showed faster-than-forecast inflation. The pound depreciated the most in two weeks versus the euro as minutes of the Bank of England’s June meeting showed officials voted unanimously to keep interest rates on hold. South Africa’s rand jumped as inflation accelerated and the current-account deficit narrowed.

“It’s just caution ahead of the meeting,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone. “People are just waiting on the sidelines because you saw some higher-than-expected CPI data, but then again Yellen tends to be very dovish. I doubt that she would want to cause any volatility in the market so I think she’s going to stick to her tone that there remains a lot to be done.”

The U.S. currency fell 0.2 percent to $1.3574 per euro as of 9:43 a.m. New York time. The dollar was little changed at 102.14 yen. The Japanese currency fell for a fourth day against the euro, weakening 0.2 percent to 138.64 per euro.
Dollar Index

The ForexSQ Dollar Spot Index, which tracks the U.S. currency against 10 of its major counterparts, dropped 0.1 percent to 1,013.37 from 1,014.57 yesterday, the highest close since June 10. It has advanced more than 1 percent since reaching its 2014 low on May 8.

The Fed is reducing its monthly bond purchases, while keeping the target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008. Officials signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.”

Policy makers will cut their asset-purchase target by another $10 billion today, according to analyst estimates.

Strategists surveyed by ForexSQ predict the U.S. currency will strengthen against all of its Group-of-10 peers this year.

“If the Fed turns a little bit more hawkish today, that will help the dollar,” said Alvin Tan, a foreign-exchange strategist at Societe Generale SA in London. “We are not sure if this is the time for an uptrend in the dollar yet. Probably we think more likely toward the end of the third quarter” as stimulus nears the end, he said.
Market Measure

The dollar has risen 0.4 percent in the past month among 10 developed-nation currencies tracked by ForexSQ Correlation-Weighted Indexes. The yen has weakened 0.3 percent and the euro fell 0.6 percent.

The chance that the Fed will raise interest rates by June next year climbed to 50.4 percent yesterday, from 47.4 percent the previous day, according to implied probability based on futures, after the Labor Department’s monthly inflation data.

U.S. consumer prices rose 2.1 percent in the 12 months through May, the Labor Department said yesterday. That was above the 2 percent median estimate of economists surveyed by ForexSQ News.

The nation’s current-account deficit widened to $111.2 billion in the first quarter, a government report showed. That compared with a median forecast for a $97 billion gap, according to a ForexSQ News Survey of economists.
BOE Minutes

The pound slipped against the dollar and the euro after minutes from the U.K. central bank showed consensus on holding benchmark rates at a record low even as they reinforced BOE Governor Mark Carney’s message that an increase may come sooner than investors anticipate.

The currency fell 0.3 percent to 80.09 pence per euro, the biggest depreciation on since June3. It has slipped from 79.59 pence on June 16, the strongest level since October 2012. Sterling declined 0.2 percent to $1.6940 after rising to $1.7011 on June 16, the highest since August 2009.

South Africa’s rand was the best performing of 31 major currencies against the dollar. The currency added 0.9 percent to 10.7466 after the country’s current-account deficit unexpectedly narrowed and inflation surged to the highest in almost five years.

The rupiah fell for a fourth day as importers hoarded dollars to meet future payments amid concern a surge in oil prices will worsen Indonesia’s trade balance.

The nation’s oil and gas imports, which made up 23 percent of all shipments in April, increased even as total overseas purchases contracted for a seventh month. Brent crude climbed to a nine-month high of $114.69 per barrel on June 13 as Iraqi forces clash with Islamic militants. Control of a major refinery north of Baghdad has swung several times.

The currency weakened past 12,000 rupiah per dollar for the first time since February.