Dollar Races Up with Fed in View
The dollar rose to two-week highs against the euro and the Swiss franc on Monday on speculation the U.S. Federal Reserve may signal a more aggressive pace of interest rate rises at its meeting Tuesday.
The Federal Open Market Committee is widely expected to raise official U.S. interest rates on Tuesday for the seventh consecutive time by a quarter-percentage point to 2.75 percent, further widening the interest rate differential over the euro zone where the ECB's minimum bid rate is 2 percent.
Some expect the Fed could signal a more aggressive stance by removing from the statement accompanying its decision on monetary policy its oft-repeated pledge to raise rates at a "measured" pace.
"The removal of the word 'measured' ... would be positive for the dollar as it suggests the Fed is giving itself room to raise rates at a faster pace later this year," Bank of New York currency strategist Michael Woolfolk told clients in a note.
Late afternoon in New York, the euro had its sharpest one-day fall since the first week of the year, down 1.1 percent from late Friday to $1.3165.
Under pressure from Asian currencies too, the euro slipped to a two-week low against the yen, at 138.31 yen, because of a news report purporting China may be getting closer to increasing the flexibility of its pegged currency regime.
The yen was helped by a report in the Beijing Daily saying China may expand its yuan currency trading band.
The yuan has been pegged since the mid-1990s at a rate of about 8.28 per dollar. If it is allowed to move more freely, it is widely expected to appreciate against the dollar.
"The People's Bank of China will gradually exit from daily forex transactions. The band within which the renminbi exchange rate floats may be expanded to 0.6 percent or 1 percent from the current 0.3 percent," the newspaper said. It did not mention a timeframe for any changes to the currency regime.
"Is it jawboning on the part of Chinese officials? We're not 100 percent sure," said a trader with GAIN Capital in Warren, New Jersey. "If it is true, then that should lead to dollar weakness."
Against the yen, the dollar was trading at 105.12 yen, up around 0.4 percent, but off an intraday high of 105.50 yen.
Against the Swiss franc, the dollar was up around 1.1 percent at 1.1774 francs.
Meanwhile, sterling fell to a 1-month low around $1.8947, down 1.2 percent for its deepest one-day fall since June. The pound also dipped to a 1-month trough against the yen, around 199.19 yen.
FLEXIBLE EU BUDGETS
The dollar was also helped by signs of flexibility on EU budget deficit limits and by comments from European and Asian central bank officials on diversification of foreign exchange reserves, analysts said.
For now, the dollar tends to be boosted by the prospect of steeper rate hikes because this increases the attraction of short-dated dollar deposits to foreign investors.
"The dollar has continued its gains in the U.S. session as the focus has shifted toward the Fed meeting and the potential for a more hawkish statement based on higher inflation and a stronger economy," said Tim Mazanec, senior currency strategist with Investors Bank & Trust in Boston.
Joseph Yam, chief executive of the Hong Kong Monetary Authority, said that he feared the euro could become so popular in Asia that it could undermine market stability. "My fear is that it might overshoot," Yam said.
The euro came under pressure after EU finance ministers agreed on Sunday to relax the stability and growth pact -- the budget rules that underpin the euro.
