Dollar near two-week high before Fed as dovish ECB supports

The dollar index versus a basket of six major currencies was steady at 97.653 after climbing to 97.766 on Tuesday, its highest level since June 3.

The focus was on whether the greenback can retain its strength after the Fed’s two-day policy meeting ends later on Wednesday.

The Fed is widely expected to stand pat on monetary policy this time but open the door for an interest rate cut at the next meeting in July.

“The market has mostly priced in a July rate cut and unless there is a big dovish surprise at the FOMC (Federal Open Market Committee) meeting it is hard to imagine the dollar coming under downward pressure,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.

“But there will be a lot to digest at this FOMC, such as the Fed’s views on the economy and prices and Chair (Jerome) Powell’s comments. It is hard to tell which of these factors the market decides to latch on and react to.”

The prospect of the U.S. central bank lowering rates has also driven benchmark Treasury yields to near two-year lows while boosting equity prices.

The euro traded at $1.1190, languishing near session lows after shedding 0.2% overnight, when it brushed a 15-day trough of $1.1181.

The common currency dropped along with a decline in German government bond yields, which hit a new record low on Tuesday, after ECB chief Mario Draghi said the bank will need to ease policy again if inflation doesn’t head back to its target.

A closely watched survey by the ZEW Institute showing that the mood among German investors had deteriorated sharply in June also weighed on the euro.

Traders are also focused on whether signs that the United States and China are preparing for trade talks at a Group of 20 leaders summit later this month will improve sentiment for risk assets and commodity currencies.

U.S. President Donald Trump said on Tuesday he will have an extended meeting with Chinese President Xi Jinping at the G20.

The world’s two largest economies are in the middle of a costly trade dispute that has pressured financial markets and damaged the world economy. Signs of a thaw between the two countries would encourage so-called “risk off” trades, which tend to cause the yen to fall and the Australian dollar to rise.

“If a meeting between Trump and Xi goes well, sentiment will improve, which will be supportive for dollar/yen,” said Tohru Sasaki, head of Japan markets research at JP Morgan Securities.

“But these days we cannot be sure about trade because attitudes and comments change from time to time and come out suddenly.”

The Australian dollar was a shade higher at $0.6871 after mounting a rebound the previous day. Australia exports a lot of commodities to China, so it would benefit greatly from progress toward ending the trade war.

However, it may prove difficult to turn bullish on the Aussie dollar over the long term because of growing expectations that the Reserve Bank of Australia may have to cut rates again.

The dollar was little changed at 108.32 yen after losing modest ground overnight as traders kept their powder dry before the outcome of the Fed’s policy meeting.

The yuan advanced to its strongest level in over three weeks on the trade news before paring its gains on doubts the Trump-Xi talks would produce a durable trade deal.

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