By Peter Nurse
Investing.com - The dollar was weaker in early European trade Wednesday, with investors wary ahead of the latest meeting of the Federal Reserve.
At 3:05 AM ET (0705 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 96.233, around levels not seen since early March. USD/JPY dropped 0.3% to 107.44, while EUR/USD stood at 1.1347, up 0.1%.
The U.S. central bank concludes its latest two-day meeting later on Wednesday, and while no major changes are expected the Fed could announce steps to curb the recent rise in bond yields.
Most analysts are playing down the chance the Fed will adopt yield curve control to guide 10-year Treasury yields lower, but uncertainty about the outcome of the Fed meeting could keep the dollar under pressure.
“We think the Fed is satisfied with its unlimited, open-ended and flexible QE programme and does not think it will gain much by announcing a monthly purchasing target,” said analysts at Danske Bank, in a research note. “We do not expect the Fed to implement yield curve control.”
"The Fed can afford to wait and see on yield curve control,” agreed Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, “because the U.S. economy has gotten past the crisis phase and only just entered the healing phase."
Elsewhere, GBP/USD traded 1.2766, up 0.3%, not far off a three-month high. Still, it’s debatable how much longer sterling can retain this strength given the uncertainty over its Brexit trade negotiations with the European Union.
“The possibility of extending the transition period expires on 1 July and despite good economic reasons for giving more time to negotiate the permanent relationship (in particular now that both the UK and the EU are in recession), we do not expect the UK to ask for an extension,” said Danske Bank.
The bank’s base case remains that the two sides can reach a simple free trade agreement on goods trading (not services), before the year-end, but the risk of a no deal Brexit has risen.