US Dollar Takes Breather, Investors Worries About Fed Rates Outlook

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On Wednesday, the greenback took a break as investors watched to whether the Fed Reserve will indicate any acceleration in the pace of future rate hikes to deal with a projected ramp up in fiscal spending under the President elect  Donald Trump.

In its policy meeting ending later in the day, the Fed Reserve is all but sure to increase its interest rate objective by 0.25 percentage point to 0.50-0.75%, which would be just the 2nd rate hike since the financial crisis in 2007-08, following the tightening last December.

“The markets think a rate hike is a certainty so the focus is on the outlook for next year. I think they will maintain their previous projections to raise rates twice next year, but if they turn more hawkish, the dollar will test its upside again,” said Shinichiro Kadota, chief FX strategist at Barclays (LON:BARC).

The dollar index compared to a basket of six major currencies  (DXY) become stable approximately 101.05 in early Asian trade, having slipped from 101.78 touched early on Monday.

The euro <eur=>traded slightly changed at $1.0628, off  Monday’s one-week low of $1.0525.

Compared to the yen, the greenback traded at 115.20 yen, backing off  a bit from Monday’s 10 month high of 116.12 yen.

Some participants were willing to take profits from the dollar’s massive rally of approximately 10% against the yen since the Nov 8 U.S. election.

Anticipations that Trump will reduce taxes, increase fiscal spending and increase U.S. development over the short-term lifted U.S. bond yields and stock prices, making the greenback  more attractive.

Inflation is also expected to heat up if Trump moves to implement his more controversial campaign possibilities, like deporting illegal immigrants and striking tariffs, further additional boosting U.S. bond yields.

Even though, many investors had long believed that Fed Reserve will increase rates really slowly and carefully, specifically under dovish Chair Janet Yellen, Trump’s surprise election victory the previous month has significantly shaken up that assumption.

On Tuesday, the two-year U.S. debt yield increase to a 6 1/2-year peak and U.S. money market futures are pricing in nearly two rate hikes next year.

“That is a sea change from before the election, when they were not fully pricing in even one rate hike in 2017.”

Commodity-linked currencies were supported by strong increases in oil costs after the Organization of Petroleum Exporting Countries (OPEC) and some of its competitors touched their first agreement since 2001 to jointly reduce production to challenge global oversupply.

On Tuesday, the Australian dollar <aud=d4>traded at $0.7494, having reached a near one-month peak of $0.7524.

The Aussie also inched near its March high of 86.66 yen (AUDJPY=R), a break of which could open a way for a test of above 90 yen touched the previous year.

The Canadian dollar raised at C$1.3135 per U.S. dollar, after having increased to as high as C$1.3102 to the dollar on Tuesday, an eight-week peak.

Russian rouble <rubutstn=mcx> was the biggest winner in the previous few sessions from rallying oil prices, which increase 5.45% over the past week compared to the dollar to hit a 16-1/2-month peak.

“The Russian currency is the best performing currency since Trump’s upset,” according to the reports.

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