Risk of Fed surprise keeps dollar well bid

TOKYO: The dollar hovered near multi-week highs on Tuesday, drawing support from traders wary of a surprise from the US Federal Reserve which is set to begin a two-day policy meeting.

Markets expect no immediate changes to monetary policy, but with positioning heavily loaded against the dollar, investors are leery of any shift in tone that could spark a rally.

The euro perched at $1.2120, just above a one-month low of $1.2093 it hit last week.

The yen hit a seven-session low of 110.15 per dollar. The US dollar index held near the top of its recent range at 90.512.

"The Fed is confronted with a balancing act of walking a tight-rope between transition and tantrums," said Vishnu Varathan, head of economics and strategy at Mizuho in Singapore.

"(A) solid US economic recovery flanked by inflation at a 13-year high demands some kind of acknowledgement, if not response," he said. "The euro, Aussie, Yen and Singapore dollar (levels) all point to cognisance about upside dollar risks."

The Australian dollar has traded sideways this year, despite rapid rises in commodity prices, as markets have focused on US data and the Fed to drive the US dollar.

The Aussie slipped marginally to $0.7705 on Tuesday after minutes from the Reserve Bank of Australia's last meeting showed the bank was prepared to keep buying bonds even though the economy has recovered its pre-pandemic output.

The kiwi dollar and sterling were also settled in narrow ranges as market volatility gauges tick down to their lowest levels since the pandemic began roiling markets in February and March 2020.

Ahead of the Fed's statement and news conference on Wednesday, markets will eye US retail sales and a manufacturing survey later on Tuesday - though mostly as a means of understanding the economic pressure on policymakers.

So far Fed officials, led by Chair Jerome Powell, have stressed that rising inflationary pressures are transitory and ultra-easy monetary settings will stay in place for some time to come, although recent economic data has raised concerns that price pressure could force an earlier stimulus withdrawal.

"While Powell will tread carefully, I expect that the Fed is warming to a more open discussion about tapering, to be formally announced in the September meeting," Chris Weston, head of research at broker Pepperstone in Melbourne, said in a note to clients.

"Any view that cements a formal announcement in September should be modestly USD bullish, but the risks are symmetrical as Powell will be keen to not hurt financial conditions," he said.

Nearly 60% of economists in a Reuters poll expect a tapering announcement in the next quarter.

In cryptocurrencies, bitcoin was able to steady above $40,000 on Tuesday and is approaching its 200-day moving average - finding support from the promise of fresh investment from major backer MicroStrategy and from Elon Musk.

Tesla boss Musk on Sunday flagged that the carmaker could resume transactions using the token if miners can use cleaner energy to process them.

Ether also got a small lift in sympathy with its bigger rival, and broke above its 20-day moving average to $2,593.40.