CURRENCIES: Dollar Mostly Lower Ahead Of Fed Meeting

By William L. Watts

The U.S. dollar edged lower Wednesday, pulled down as investors showed renewed appetite for equities and risky assets, analysts said, although many traders appeared content to stay on the sidelines ahead of the conclusion of the U.S. Federal Reserve's two-day policy meeting.

The Fed's policy committee will conclude its two-day meeting later Wednesday. An announcement with policy makers' outlook for rates and the economy is expected Wednesday at about 2:15 p.m. Eastern.

The dollar index (DXY), which tracks the U.S. currency against a trade-weighted basket of major rivals, traded recently at 76.109, down from 76.369 in North American trade late Tuesday.

Meanwhile, gold continued to press higher with futures setting another new record Wednesday. Gold jumped on Tuesday after India's central bank bought 200 metric tons of the precious metal from the International Monetary Fund.

European stocks gained ground. U.S. stock index futures pointed to a higher open on Wall Street after Tuesday's mixed finish.

The overwhelming consensus is that the Fed will hold the federal funds rate steady at near-zero, where the target has been since last December. Investors will be paying close attention, however, to the wording of the Fed's statement for any clue as to when the central bank would begin pushing interest rates higher.

Ideas the committee could change the phrasing of the statement away from its previous pledge to maintain "exceptionally low" interest rates for an "extended period" have gained traction.

Strategists said such a move would have little significance for the near-term rate outlook, but could provide scope for a relief rally by equities, which have lost ground in choppy trading since their October peak.

"This would clear the way for a rally in high-yield and commodity currencies (Australian dollar, New Zealand dollar, Canadian dollar), with the British pound probably lagging ahead of tomorrow's [Monetary Policy Committee] meeting," said Kenneth Broux, market economist at Lloyds TSB, in a note to clients.

"Conversely, a more hawkish message by the Fed would present the dollar with some potentially strong tailwinds" as a result of the "double whammy" of safe-haven appeal and interest-rate differentials, he said, leaving the euro vulnerable to a pullback below $1.46 versus the dollar.

The euro changed hands at $1.4761, up from $1.4712. The dollar pushed higher against the Japanese currency, however, to trade at 90.81 yen from 90.34 yen Tuesday.

The British pound gained ground against the dollar and the euro after a survey of purchasing managers indicated the U.K.'s dominant services sector saw activity rise at its fastest pace in more than two years.

The pound changed hands at $1.6511 versus the dollar, a gain of 0.5% on the day. The euro slipped 0.2% versus sterling to fetch 89.38 pence.

The jump by the services purchasing managers index underlined ideas the U.K. economy will see a return to growth in the fourth quarter and also underpinned expectations an unexpected 0.4% drop in third-quarter gross domestic product will be revised upward, said Jane Foley, research director at Forex.com, a currency advisory firm.

She noted, however, that stronger services PMI readings in the third quarter were a prime reason economists missed the third-quarter GDP decline.

"While today's number will increase confidence that this number will be revised higher ... it also suggests that there could be a sizable delay between the PMI data and the official GDP series."

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(END) Dow Jones Newswires

November 04, 2009 07:33 ET (12:33 GMT)


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