Dollar edges higher ahead of Fed decision; yen remains weak

Investing.com - The U.S. dollar edged higher in early European trade Wednesday ahead of the conclusion of the latest Federal Reserve meeting, while the yen remained near its one-year low. 

At 04:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 106.612.

Fed decision, Powell’s press conference in focus

The U.S. dollar has continued to trade on the firm side as traders prepare for the conclusion of the latest policy-setting Fed meeting later in the day. 

While the central bank is expected to hold rates unchanged, it is also set to reiterate its higher-for-longer stance given recent data has pointed to a resilient economy despite a prolonged series of interest rate hikes - a scenario that bodes well for the dollar.

“Additionally, the geopolitical background remains dollar positive, where any threat of escalation in the Middle East and what it could do to oil prices remains a dollar positive,” analysts at ING said, in a note.

Comments from Chair Jerome Powell will take the spotlight as investors parse every word to gauge where interest rates are headed, particularly looking to see if Powell attempts to keep another hike on the table.

Traders remain on yen intervention watch

This dollar strength has been most apparent against the Japanese yen in the wake of the Bank of Japan’s latest policy meeting, at which the Japanese central bank decided to keep interest rates negative, while only making minimal changes to its yield curve control policy.

The “BoJ meeting has not triggered the reset on how we view the yen and the risk is now that USD/JPY pushes ahead to 152 and prompts the central bank into aggressive FX intervention,” said ING.

The BOJ intervened in the government bond market earlier Wednesday to rein in a jump in yields, after the benchmark 10-year Japanese government bond yield rose 2 basis points to 0.970% on Wednesday, a level last seen in May 2013.

This has helped USD/JPY drop 0.2% to 151.31, but the Japanese currency remains close to the one-year low of 151.74 it hit on Tuesday and the three-decade low of 151.94 touched last year, which triggered an intervention by Tokyo at the time.

Masato Kanda, Japan's top currency diplomat, said authorities were on "standby" to respond to yen's recent "one-sided, sharp" falls, but it may need actual intervention instead of stern comments to stop more yen weakness.

Euro slips lower ahead of Powell’s comments

EUR/USD fell 0.1% to 1.0562, in the wake of data showing prices rose by just 2.9% in the euro zone in October, their slowest pace since July 2021.

The European Central Bank must keep interest rates sufficiently high for long enough because inflation in the euro zone has not been conquered despite a significant fall in the past year, ECB policymaker Joachim Nagel said on Tuesday.

However, this data feeds into the narrative that the ECB is done tightening, and the euro could see more weakness if Fed Chair Powell is deemed to be hawkish later in the session.

Chinese private PMIs disappoint

USD/CNY rose 0.1% to 7.3194, with sentiment towards the Chinese yuan remaining largely negative, as a private PMI survey showed that China’s manufacturing sector contracted in October.

The reading followed a government survey on Tuesday which showed a similar decline, and saw markets grow even more doubtful over a Chinese economic rebound this year.  

Elsewhere, GBP/USD traded largely flat at 1.2154, with Nationwide house prices rising in October ahead of the Bank of England’s latest policy meeting later in the week.