By Karen Brettell
NEW YORK (Reuters) – The dollar slipped on Wednesday ahead of the conclusion of the Federal Reserve’s two-day policy meeting, with investors focused on whether Fed Chair Jerome Powell will adopt a more hawkish tone as inflation remains stubbornly above its 2% annual target.
Stickier than expected consumer price inflation in March dashed hopes that elevated readings in January and February were anomalies, leading traders to push back expectations on when the U.S. central bank is likely to cut interest rates.
Fed fund futures traders price in only one rate cut this year, with a roughly 50% probability it will occur in September. Traders had previously expected three rate cuts this year, likely beginning in June.
The dollar index fell 0.11% to 106.20, after earlier reaching 106.49, the highest since April 16. A break above the 106.51 would be the highest since early November.
“The market is clearly concerned that the Fed will take some hawkish steps,” said Adam Button, chief currency analyst at ForexLive in Toronto.
However, Powell is unlikely to put the prospect of new interest rate hikes on the table on Wednesday, and is instead likely to promote holding rates higher for longer.
That could disappoint investors and send the dollar lower against peers.
“We’ve seen this play out dozens of times where the market gets frightened about a hawkish Fed and then Powell is neutral or dovish,” Button said.
The ADP Employment report on Wednesday showed that U.S. private payrolls increased more than expected in April while data for the prior month was revised higher.
A U.S. Labor Department report, meanwhile, showed that job openings fell in March.
Separately U.S. manufacturing contracted in April amid a decline in orders after briefly expanding in the prior month, while a measure of prices paid by for inputs approached a two-year high.
The euro gained 0.14% to $1.0682. The pound weakened 0.09% to $1.2479.
The dollar fell 0.17% to 157.53 yen.
The Japanese currency rallied sharply on Monday, with traders citing yen-buying intervention by Japanese authorities to try to underpin a currency languishing at levels last seen over three decades ago.
The dollar has since crept higher, raising questions on whether additional steps will be needed to stop further yen weakness. The Japanese currency is suffering from a wide interest rate differential that makes borrowing in the yen and investing in U.S. assets attractive.
“There aren’t many options for Japan. In one way intervention is just an invitation to buy the dip for most FX traders at better levels,” said Button. “Dollar/yen will not stop climbing until the U.S. economy cools off.”
In cryptocurrencies, bitcoin fell 4.41% to $57,226 after earlier reaching $56,483, the lowest since Feb. 27.
(Reporting By Karen Brettell; editing by Barbara Lewis)
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