SEPTEMBER 27, 2018 – The dollar rose to a one-week high on Wednesday before a widely anticipated Federal Reserve interest rate hike, although investors were still on edge about a trade spat between the United States and China.
The Fed is expected to raise interest rates later in the day for the eighth time since late 2015. Investors are also counting on another rate increase by the end of the year. The outlook for 2019, however, were less clear.
Market participants are likely to focus on the central bank’s policy outlook and any comments on the global trade dispute.
“At this time, the consensus view is that the Fed will remain on a hike-a-quarter (percentage point) path but recent escalation of trade war rhetoric with China may give Fed officials pause,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
“Although no one expects Fed Chairman (Jerome) Powell to be dovish if he focuses on policy being ‘data-dependent’ rather than emphasizing the recent spate of growth, the dollar could take a hit regardless of the rate hike,” he added.
In mid-morning trading, the dollar index, which measures the U.S. unit against six major currencies, rose 0.3 percent to 94.367.
Global markets have been unsettled in the past few months because of a heated trade dispute between the world’s two largest economies and its possible impact on world growth.
China on Wednesday said it would cut import tariffs for products including machinery and electrical equipment as it braced for an escalation in the trade row with the U.S.
The cuts are expected to lower costs for consumers and companies by about 60 billion yuan ($8.73 billion) this year.
After the announcement, the dollar index rose.
The United States imposed fresh tariffs of 10 percent on $200 billion worth of Chinese goods on Monday, which will rise to 25 percent by the end of 2018.
The year began with the dollar retreating, but a hawkish rate outlook and the U.S.-China trade dispute have made the greenback a safe haven for investors. In recent weeks, though, it has lost ground as other economies, such as those in the euro zone, improved and moved closer to tightening monetary policy.
The euro traded down 0.4 percent at $1.1730, mainly due to profit-taking after it touched a 3-1/2-month high on Monday as European Central Bank President Mario Draghi expressed confidence in euro zone inflation and wage growth.
The outlook for the euro has brightened and market participants are positioning for a rebound.
“The pieces are steadily falling into place for a more sustained rebound in the single European currency, including more favourable capital flow dynamics and more balanced euro positioning,” said Wells Fargo in a research note.
