Dollar steadies ahead of Fed meeting

Synopsis

Dollar remained stable before key central bank meetings. Euro showed little reaction to France's credit downgrade by Fitch. Investors are awaiting rate decisions from the US Federal Reserve, Bank of Japan, and others. Market anticipates potential rate cut from the US Federal Reserve. Focus is also on US-China trade talks and TikTok divestiture deadline.

The dollar held steady on Monday ahead of a pivotal week filled with central bank decisions led by the Federal Reserve, while the euro hardly reacted to Fitch's downgrade of France's credit rating.

Trading in Asia was thinned with markets in Japan closed for a holiday, leaving currencies mostly rangebound in the early session.

The euro last traded 0.09% lower at $1.1724, with investors mostly brushing off Friday's announcement from Fitch to downgrade France's sovereign credit score to the country's lowest level on record.

The move strips the euro zone's second-largest economy of its AA- status as it grapples with political crisis and ballooning debt.

Still, much of investors' attention this week will be on the slew of rate decisions in the U.S., Japan, United Kingdom, Canada and Norway that could set the tone for markets, with the Fed taking centre stage.

Expectations of a rate cut from the Fed on Wednesday have weighed on the dollar in recent times, though it last steadied at 97.65 against a basket of currencies on Monday.

Sterling was little changed at $1.3554, while the Aussie dollar hovered near a 10-month high at $0.6652.

"We are calling for a 25-basis-point cut from the FOMC this week, which is more than fully priced," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Just as important will be Fed members' "dot plot" projections for rates and guidance from Fed Chair Jerome Powell on the extent and pace of any further easing.

"In order to have an impact on currencies, Powell will have to out-dove the market by giving quite explicit hints about follow-up rate cuts. And if the FOMC does deliver an outsized 50-basis-point cut, that could also push the dollar down quite significantly, unless he suggests that there is a limited chance of follow-up cuts," said Kong.

Elsewhere, the yen strengthened slightly to 147.56 per dollar, ahead of the Bank of Japan's (BOJ) policy meeting later in the week.

While the BOJ is expected to stand pat on rates, focus will similarly be on comments from Governor Kazuo Ueda on the future policy path.

"The JPY continues to underperform in the near-term undermined by the pick-up in political uncertainty in Japan after PM Ishiba resigned," said analysts at MUFG in a note.

"The BOJ would have to provide a signal that a rate hike could be delivered as soon as next month to trigger a reversal of JPY weakness."

In other currencies, the New Zealand dollar eased 0.03% to $0.5953, while the offshore yuan was little changed at 7.1230 per dollar.

U.S. and Chinese officials concluded a first day of talks in Madrid on Sunday on their strained trade ties and a looming divestiture deadline for Chinese short-video app TikTok, amid Washington's demands that its allies place tariffs on imports from China over its purchases of Russian oil.

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