Dollar awaits Fed outcome, Aussie firmer after inflation data

Tue Jan 26, 2016 11:50pm EST
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By Masayuki Kitano and Ian Chua

SINGAPORE/SYDNEY (Reuters) - The dollar struggled to gain traction on Wednesday as markets awaited clues on interest rate policy from the Federal Reserve, while the Australian dollar rose after one measure of domestic inflation was slightly higher than expected.

The dollar index =USD .DXY last stood at 99.041, nursing a 0.3 percent loss recorded on Tuesday and staying well below a seven-week high of 99.799 set last Thursday.

Wednesday's main focus will be on the statement released by the Fed after its Jan. 26-27 policy review. While the central bank is almost certain to keep interest rates unchanged, investors are keen to see its latest economic outlook given the turbulent start to global financial markets this year.

"If the statement refers to falls in oil prices and turmoil in financial markets or points to their impact on the outlook for inflation and growth, that could be seen as being dovish and lead to selling pressure against the dollar," Masafumi Yamamoto, chief FX strategist at Mizuho Securities in Tokyo, said in a research note.

The downside for the dollar against the yen could be limited even in such a case, however, if such a dovish-sounding Fed statement helps alleviate risk aversion and gives a lift to U.S. equities, Yamamoto added.

The dollar slipped 0.2 percent against the yen to 118.19 yen JPY=, staying within its 118.85 yen to 117.65 yen seen so far this week.

Yet, with Fed fund futures <0#FF:> implying just one rate hike this year, the risk is that anything the Fed says may be interpreted as hawkish. That could see the greenback bounce back, some traders said.

More central bank policy decisions are coming up this week, with the Reserve Bank of New Zealand (RBNZ) announcing its decision on Thursday and the Bank of Japan's (BOJ) policy statement due on Friday.   Continued...

Canadian Loonies, otherwise known as a one dollar coin, are displayed on top of an American currency in this posed photograph in Toronto, October 10, 2008.  REUTERS/Mark Blinch