CURRENCIES: Dollar Gains After Fed Minutes, As Geopolitical Tensions Escalate

By Anora Mahmudova, MarketWatch , Rachel Koning Beals Features Dow Jones Newswires

Sterling drops after lackluster U.K. service-sector data

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The U.S. dollar held on to slight gains against the euro and the yen late Wednesday in New York after minutes from the Federal Reserve's latest meeting suggested that a move to reduce the massive balance sheet may start as soon as September.

Since 2009 the Fed had bought government bonds swelling its balance sheet to $4.5 trillion during quantitative-easing programs to stimulate the economy. Gradually reducing the balance sheet by not reinvesting the proceeds and letting maturing bonds expire, the Fed can effectively tighten monetary policy.

Analysts believe that reducing the balance sheet will push borrowing rates and the dollar higher, but possibly in a less aggressive way than an outright rate increase, market analysts say.

Alfonso Esparza, senior market analyst at OANDA said the Fed could start reducing its balance sheet as early as September and raise interest rates again in December, with an eye firmly on sluggish inflation in the second half of 2017. Stubbornly low prices, with inflation below the Fed's 2% target, could give the central bank pause in its plans to enact dollar-boosting monetary-policy normalization.

Earlier, the dollar strengthened slightly against the euro, the yen and emerging-market currencies, as geopolitical tensions escalated ahead of the Group of 20 summit (http://www.marketwatch.com/story/white-house-says-trump-putin-to-meet-at-g-20-summit-on-friday-2017-07-04) in Germany later this week. On Tuesday, North Korea successfully launched its first ballistic missile capable of reaching the parts of the U.S (http://www.marketwatch.com/story/north-korea-claims-successful-test-firing-of-an-icbm-2017-07-04).

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The ICE Dollar Index , which measures the greenback against a basket of six rival currencies, pared earlier gains to trade 0.1% higher at 96.2600.

Against the yen , the dollar first strengthened to two-month highs, but pared gains to trade at Yen113.34, compared with Yen113.28 late Tuesday. The pair traded as high as Yen113.69 earlier.

"The dollar-yen pair is very sensitive to news from North Korea and we expect it to move on geopolitical news," Esparza said.

The euro was fetching $1.1339 most recently, compared with $1.1347 late Tuesday. The shared currency had traded up to $1.1370.

The ICE dollar index last week closed out 2017's second quarter with its worst quarterly loss since September 2010, pressured by hawkish comments from the heads of the European Central Bank and the Bank of England, which lifted their respective currencies relative to the dollar. Doubts about President Donald Trump's pro-growth agenda becoming a reality also have hobbled greenback against major rivals.

See:Dollar bulls have a lot to worry about in second half of 2017 (http://www.marketwatch.com/story/dollar-bulls-have-a-lot-to-worry-about-in-second-half-of-2017-2017-06-29)

In economic news, factory orders for May fell by 0.8%, slightly more than a 0.7% drop forecast by Wall Street, according to economists polled by MarketWatch.

Elsewhere, the pound eased Wednesday to $1.2928, versus $1.2920 late Tuesday as a reading of Britain's services sector was only the latest of a series of weaker data that could deter the BoE from raising record-low interest rates for the first time in 10 years.

Growth across British services companies fell to a four-month low in June and companies were their least optimistic in nearly a year, according to Wednesday's Markit/CIPS UK Services Purchasing Managers' Index. The index edged down to a four-month low of 53.4 in June from 53.8 in May.

Emerging-market currencies were largely weaker on Wednesday as commodity prices dropped. Currencies of oil producers also suffered as crude-oil prices settled more than 4% lower on the day.T

The Canadian dollar weakened, with the buck buying C$1.2983, up from C$1.2937 late Tuesday.

Russian ruble dropped about 1% against the dollar, with the greenback buying 60.2352 rubles, compared with 59.4513 late Tuesday.

Meanwhile, Turkish lira also weakened sharply against the dollar, trading at 3.6106, vs. 3.5594 late Tuesday.

(END) Dow Jones Newswires

July 05, 2017 15:23 ET (19:23 GMT)