FOREX-Dollar stands tall as Fed heads toward taper

By Tom Westbrook SINGAPORE, Nov 3 (Reuters) – The dollar held within striking distance of the year’s peaks on the euro and yen on Wednesday, as investors looked for the Federal Reserve to begin unwinding pandemic-era policy support faster than central banks in Europe and Japan. Moves were slight in Asia ahead of the Fed’s meeting later in the day and the dollar bought 113.84 yen, against a 2021 peak of 114.69, and traded at $1.1582 per euro against the year’s top of $1.1522 per euro. The U.S. dollar index held overnight gains to sit at 94.074. The Fed is expected to announce the tapering of its $120 billion-a-month asset purchase programme in its policy statement at 1800 GMT. But traders are focused on clues around what that means for timing of rate rises, after a month of seismic bond market moves in anticipation of hikes as soon as next year. “The market is not easily convinced that there will be an extended lag between the completion of taper and the start of the rate hiking cycle,” said OCBC Bank rates strategist Frances Cheung. “Fed Fund futures pricing of two rate hikes by end-2022 does not look as stretched as the pricing in markets such as SONIA futures (GBP) or bank bill futures (AUD).” A day ago, the Reserve Bank of Australia abandoned its short-term yield target and dropped its expectation of holding rates at record lows until 2024, though the Aussie fell because the bank also pushed back on aggressive pricing for 2022 hikes. The Aussie had dropped 1.2% against the dollar on Tuesday and sat at $0.7436 on Wednesday. The kiwi was also dragged 1% lower, but found support on Wednesday from strong labour data and hovered at $0.7120. Currency markets’ next moves likely depend on traders’ perceptions of the relative pace of policy tightening and on whether markets can stick with an assumption that the Fed funds rate won’t get much higher than 1.75% through the cycle. “Fed Policy is under challenge in ways that cannot be remembered since the early Volcker years,” said Deutsche Bank strategist Alan Ruskin. “Inflation is taking off with an economy that has been pricing itself off zero nominal rates and dramatic negative real rates for the last 18 months,” he said. So far, Ruskin added, the dollar had been held back by rising expectations of even faster hiking elsewhere in the world, but risks lie ahead if traders start to think that more than a few rate rises will be needed to tame fast-rising prices. “If the expected resilience of the real economy to rate hikes is correct, and inflation is similarly stubborn, the market expectations on the terminal funds rate at near 1.75% by the end of 2026 looks way too low,” he said. Also ahead this week is a Bank of England meeting where swaps pricing points to a modest rate hike, but a falling currency suggests a risk of disappointment or at least of a fairly stern push back against market inflation expectations. “I lean towards a 15bps hike at this meeting with a 5-4 vote in favour,” said Luke Suddards, strategist at broker Pepperstone. “However, because this is basically baked into the price, I would say the risk is for sterling to weaken if they decided rather to hold and we see some dovish repricing in money markets.” Sterling sat just above a two-week low at $1.3628 in Asia, roughly in the bottom half of range it has traded since July. Besides the Fed meeting, eurozone unemployment data is due later on Wednesday and several European Central Bank officials make public appearances, with French central bank head Francois Villeroy de Galhau the most notable at 1300 GMT. ======================================================== Currency bid prices at 0512 GMT Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Euro/Dollar $1.1582 $1.1580 +0.03% -5.20% +1.1588 +1.1575 Dollar/Yen 113.8250 113.9600 -0.04% +10.28% +114.0050 +113.9100 Euro/Yen Dollar/Swiss 0.9138 0.9146 -0.07% +3.31% +0.9151 +0.9137 Sterling/Dollar 1.3629 1.3615 +0.11% -0.23% +1.3633 +1.3606 Dollar/Canadian 1.2419 1.2410 +0.06% -2.48% +1.2422 +1.2407 Aussie/Dollar 0.7436 0.7429 +0.08% -3.35% +0.7440 +0.7425 NZ 0.7120 0.7110 +0.15% -0.84% +0.7130 +0.7107 Dollar/Dollar All spots Tokyo spots Europe spots Volatilities Tokyo Forex market info from BOJ (Reporting by Tom Westbrook; Editing by Sam Holmes)