LONDON: The dollar held firm on Wednesday as investors waited to see if the US Federal Reserve would reinforce market expectations for rate hikes next year.
The Fed's policy statement and economic projections will come at 1900 GMT.
Markets have been pricing for the Fed to end its bond-buying around March and then proceed with one or maybe two rate hikes in 2022. Anything more than two rate hikes pencilled in for next year would be considered a hawkish surprise.
The Fed meeting comes as the rapid spread of the Omicron variant of COVID-19 is causing concern that the economic recovery will be derailed.
But the expectation of Fed hawkishness has kept the dollar strong in recent weeks - it has seen little movement since it hit 96.938 last month, its highest since July 2020.
"We can't recall going into an FOMC meeting with the consensus so strongly favouring a hawkish outcome," wrote MUFG head of research Derek Halpenny in a note to clients.
"(Fed chairman Jerome) Powell may emphasise the uncertainty of the guidance to such an extent this evening that it dampens the response... The scope for a big move for the US dollar this evening may be limited."
The dollar's moves were muted as investors awaited the meeting. It held firm in the Asian session, then slipped slightly as European markets opened, down 0.1% at 96.445.
Versus the Japanese yen, the dollar was up 0.1% at 113.7.
Elsa Lignos, global head of FX strategy at RBC Capital Markets, wrote in a client note that if the Fed did not emphasise the gap between ending asset purchases and raising rates, or if markets repriced to expect a higher terminal rate, then that would be a positive surprise for the dollar.
Currency markets were little affected overnight by mixed economic data from China, which showed that factory output grew faster than expected but retail sales missed forecasts.
The euro was up 0.1% at $1.127 ahead of a European Central Bank meeting on Thursday, where officials are expected to confirm that the bank's pandemic bond-buying programme will end next March.
Britain's pound briefly rose against the dollar after data showing that UK inflation jumped to its highest in more than 10 years in November.
At 0853 GMT, it was up 0.4% on the day at $1.3278.
The Bank of England is expected to keep rates unchanged when it meets on Thursday, due to the spread of the Omicron variant in Britain.
The Australian dollar was up 0.4% at $0.71335. The New Zealand dollar was up 0.2% at $0.6756.
Meanwhile, the cryptocurrency bitcoin was little changed at $48,509.9 - a far cry from its latest all-time high of $69,000 which was reached in early November.
US retail sales are also due later in the session.
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