Dollar dips on expectations for dovish Fed policy statement

NEW YORK: The US dollar was modestly weaker against most major currencies on Wednesday on expectations the Federal Reserve would strike a dovish tone in an afternoon policy statement, while the risk of a hawkish shift mitigated losses.

The euro was last up 0.2 percent against the dollar at $1.1321 ahead of the scheduled 2 p.m. EDT (1800 GMT) release of the statement from the U.S. central bank's interest rate-setting committee. The dollar was also down 0.09 percent against the yen to trade at 111.20 yen.

The Fed is expected to leave rates unchanged as it continues to monitor the impact from weakening global growth, but some analysts said the central bank could alter its language to highlight reduced global risks.

"The markets are setting up for a pretty dovish statement after this Fed meeting," said Chris Gaffney, president of EverBank World Markets in St. Louis. He said the risk of a hawkish tweak to the Fed's language was limiting the greenback's losses in the morning session.

Fed fund futures contracts on Wednesday suggested traders were pricing in just a 2 percent chance of a rate hike on Wednesday, according to CME Group's FedWatch program. Higher U.S. rates generally boost the dollar by driving investment flows into the United States.

Fed Chair Janet Yellen told reporters after the last policy meeting in March that "caution is appropriate" when it comes to raising rates, and she highlighted the challenges to the global economy.

Currency strategists at Scotiabank also noted the potential for a hawkish surprise, and wrote in a research note: "We look to a moderation in the degree of Fed caution and expect broad USD support in response to this shift."

Analysts said uncertainty surrounding the outcome of a Bank of Japan policy statement on Thursday was keeping the dollar mostly stable against the yen.

"Investors are in 'wait-and-see' mode with the Bank of Japan," said Gaffney of EverBank. "They don't want to put unnecessary risk positions on right now."

The dollar index, which measures the greenback against a basket of six major currencies, was last down 0.21 percent at 94.374.

The Australian dollar, however, fell 2 percent to a more than two-week low of $0.7587 after unexpectedly worse inflation data revived speculation that the Reserve Bank of Australia could cut interest rates at its May policy meeting.