LONDON: The dollar pulled back from near multi-week highs on Wednesday as oil prices stalled and ahead of a Federal Reserve decision that traders expect will bring the first of several possible U.S. interest rate hikes.
The dollar has advanced along with yields and energy prices this week, running furthest against the yen and New Zealand dollar, the former of which touched a one-week low of 155.49 per dollar during the Asian session.
Financial markets are betting heavily that Fed policymakers will lift their benchmark rate by a quarter of a percentage point, to a 3.75%-4.00% range, and signal further tightening ahead.
"Even though a hike is close to being fully priced, we could see some dollar strength (if they raise interest rates)," said Kirstine Kundby-Nielsen, senior FX analyst at Danske Bank.
At $1.1554 the euro was not far from Monday's one-month low of $1.1523. Sterling was at $1.3483 after British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady.
The dollar index, which measures the currency against major peers, was down less than 0.1% at 99.59.
Currency markets have not moved that much while global bond yields have climbed in concert over recent weeks, because sovereign bonds have moved in tandem and not shifted relative differences between countries' yields very far.
But the dollar gained traction in the last few sessions on thinking that despite President Donald Trump hiring Fed Chair Kevin Warsh to cut interest rates, he will need to hike a few times to show that the Fed is serious about taming inflation fanned by the Iran war and the resulting energy price surge.
"If you end up getting a hike and Warsh doesn't vote for it, then you could get a setback in the dollar," said Danske Bank's Kundby-Nielsen.
"There would be a focus on credibility."
YEN TEST
The yen has been in the midst of its most promising rally for months on a combination of a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the U.S. and talk of Japanese investors repatriating capital.
Traders see an 80% chance that the Bank of Japan hikes rates on Friday, LSEG data show, and have priced in two 25-basis-point hikes by the end of January.
"The yen's path will continue to depend heavily on interest rate differentials," David A. Meier, economist at Julius Baer, said in a research note.
"We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets," he added.
A long rally in China's yuan has lost momentum at around 6.71 to the dollar, but the currency is holding its gains despite a widening gap between low Chinese yields and rates elsewhere. - Reuters
