Dollar Inches up as Fed Eyed for June Rate Steer


The dollar inched up against most major currencies on Wednesday, as investors eyed a U.S. Federal Reserve statement later in the day for guidance on whether bets for a June interest rate hike are justified.

The Fed is widely expected to keep interest rates unchanged at the end of its two-day policy meeting on Wednesday, but investors will be looking to see whether the central bank downplays the recent soft patch in the economy to leave the door open for a move next month.

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A June hike is currently 65 percent priced in by markets, according to Reuters data.

The dollar index, which measures the greenback against six major currencies but the majority of whose weighting is against the euro, edged up 0.2 percent to 99.094, close to a 5-1/2-month low of 98.695 hit last week.

Data showing the euro zone economy started the year with robust growth that far outstripped that of the United States had little effect on the euro, with analysts saying that the single currency - which hit its highest levels since early November last week - already had a lot of good news priced into it.

The euro edged down 0.2 percent against the broadly stronger dollar to $1.0911, close to last week's peak of $1.09515.

"The ECB (European Central Bank) may be talking about policy normalization, but at the end of the day they’re still easing; they’re still expanding the balance sheet," said Barclays currency strategist Hamish Pepper, in London.

"That’s where some of this hawkish rhetoric that's emerging around the ECB, and bullish rhetoric around the euro, will really be tested in the second half of this year," he added, saying that the euro would struggle to rise much further above $1.09.

While the ECB continues to pump tens of billions of euros into the euro zone economy each month, the Fed has raised interest rates twice in the past six months and is expected to hike them twice more by the end of the year.

But weak U.S. April auto sales data released on Tuesday added to recent worries about the outlook for the U.S. economy, which grew at its slowest rate in three years in the first quarter of the year.

"If you look at how markets are positioned right now, it feels like hoping for the best but psychologically braced for a not so positive message (from the Fed)," said UBS Wealth Management analyst Geoffrey Yu, in London.

"The data of late probably hasn’t been enough to justify any excess buoyancy or excess bullishness (but) given the experience of March, when no one thought it was a live meeting and then the Fed turned it into a live meeting, I don’t think anyone would make that mistake again."

Against the yen, the dollar was up 0.2 percent at 112.22, close to a six-week high of 112.33 yen set on Tuesday.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Additional reporting by Masayuki Kitano in Singapore; Editing by Andrew Heavens)