NEW YORK: The dollar edged higher against the euro on Wednesday, rebounding from a four-year low hit in the previous session, as investors awaited a widely expected Federal Reserve interest rate cut later in the day.
Major currency pairs held to tight ranges, with traders reluctant to take big positions before guidance from the Fed on the policy outlook.
“Currencies are treading water in quiet trade ahead of this afternoon’s highly-anticipated FOMC meeting as FX traders sit on their hands and wait for clarity from the Fed,” said Matthew Weller, global head of market research at StoneX.
The euro was 0.2 percent lower against the dollar at USD1.18485, after rising to a high of USD1.18785, its strongest since September 2021, on Tuesday.
The dollar index, which measures the US currency against six others, was up 0.1 percent at 96.76.
The Fed began a two-day meeting on Tuesday with a new governor on leave from the Trump administration, Stephen Miran, joining the deliberations, and a second policymaker at the table still facing efforts by Trump to oust her.
A federal appeals court on Monday blocked Fed Governor Lisa Cook’s firing, paving the way for Cook, an appointee of former President Joe Biden, to participate fully in the policy meeting this week.
Markets expect a 25-basis-point rate cut on Wednesday, with rapidly softening labor market data being the key driver of the ramp-up in easing bets in recent weeks.
Traders expect some 68 basis points of Fed easing moves by year-end and a total of 147 bps by the end of 2026.
The dollar’s sharp losses in recent days on rising expectations for rate cuts mean the buck could see a near-term rebound if the Fed signaled more caution with rate cuts going forward, analysts said.
“With traders already pricing in 80 percent odds of another 25bps interest rate cut in October, anything less than a full-throated endorsement of additional interest rate cuts could lead to a near-term bounce in the greenback,” StoneX’s Weller said.
Still, many market participants see further losses in store for the dollar. The index is down nearly 11 percent this year.
“If the Fed were to sound a little more hawkish this week, that could lift the dollar. But I’d argue the effect would be temporary, as doubts would linger over whether the Fed may need to accelerate its rate-cutting cycle,” said Paul Mackel, global head of forex research at HSBC.
“That’s because some US employment indicators have clearly been cooling,” he added.
US single-family homebuilding and permits for future construction dropped in August amid a glut of unsold new houses and a softening labor market, shrugging off falling mortgage rates.
Meanwhile, sterling was little changed on the day at USD1.36515, not far from 2-1/2-month highs after British inflation data matched expectations.