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Markets

Major currencies on hold as investors keep eagle eye on Fed guidance

  • The dollar index stood at 91.866, having risen for the last three sessions, drawing support mainly from elevated US bond yields on the back of expectations of a strong economic recovery.
17 Mar 2021

TOKYO: Major currencies held tight ranges on Wednesday as investors looked to the US Federal Reserve's policy meeting for any indications it could start rate hikes earlier or let bond yields rise further.

The dollar index stood at 91.866, having risen for the last three sessions, drawing support mainly from elevated US bond yields on the back of expectations of a strong economic recovery.

Fed policymakers are expected to give a nod to such a rosy view, by forecasting that the US economy will grow in 2021 at the fastest rate in decades, as the COVID-19 vaccination campaign gathers pace and a $1.9 trillion relief package washes through to households.

A bigger question for market players is whether the Fed will signal any inclination to start raising interest rates in 2023, earlier than it has previously said, in a move that could fuel a further rally in the dollar.

"The Fed will likely revise up its economic forecast. But for its median forecast on the Fed funds rate in 2023 to be raised, four or more members have to raise their projections.

So the market's expectations of earlier rate hikes may not be validated by the Fed," said Shinichiro Kadota, senior currency strategist at Barclays.

"But on the other hand, the Fed is likely to sit idle on rising long-term rates as well. All considered, it is hard to expect the dollar/yen to weaken after the FOMC, though it could face more headwinds if it tests new highs."

The dollar stood at 109.01 yen, not far from Monday's nine-month high of 109.365.

The euro changed hands at $1.1903, having declined over the last three days, with immediate supports at its 200-day moving average of $1.1843 and last week's 3 1/2-month low of $1.18355.

But a possible delay in vaccinations could weigh on the common currency as Sweden and Latvia joined countries suspending their use in a further blow to Europe's vaccination rollout.

Europe's medicines watchdog will release results of its investigation into incidents of bleeding, blood clots and low platelet counts in recipients of AstraZeneca's coronavirus vaccine on Thursday afternoon.

"Depending on the outcome, it could hurt the euro zone's business sentiment further and the euro could face fresh selling pressure on the low vaccination theme," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

Among major currencies, the US dollar and the British pound have been bolstered by the faster pace of vaccine rollouts in the United States and Britain.

Investors were so focused on an economic upturn due to vaccination that surprisingly weak US economic data published on Tuesday, including retail sales and industrial out, hardly dented the mood.

The British pound bounced back to $1.3899, after Europe's medicines watchdog said there was no evidence AstraZeneca's vaccine was unsafe.

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