By Greta Rosen Fondahn
(Reuters) -The dollar steadied on Wednesday ahead of the U.S. Federal Reserve’s policy decision, with investors on edge for hints of how much interest rates might fall this year, while they broadly expect the central bank to keep policy unchanged for now.
Expectations that trade policies under President Donald Trump could boost U.S. growth, but also push up inflation, fuelled bets on higher-for-longer interest rates in the lead-up to the inauguration, supporting the dollar.
But as the tariff action investors had braced for has yet to materialise, currency markets have been volatile since Trump took office and the dollar has weakened.
Markets on Wednesday turned their attention to the outcome of the first Fed meeting of the year – less than a week after Trump said he wanted the central bank to cut interest rates.
The dollar index, which measures the dollar against a basket of other major currencies, was up 0.2% at 108.13.
The index touched a one-month low on Monday at 106.96 amid a global selloff in technology stocks and rush to safe-haven currencies like the Japanese yen and Swiss franc, but the index is still up more than 4% since the U.S. election in November.
Money markets expect the central bank to hold rates steady, as Fed officials weigh how the Trump administration’s economic agenda may affect sticky inflation and solid growth trends.
But investors will be attentive for any hints from Fed Chair Jerome Powell on whether a rate cut could happen soon if inflation eases closer to the Fed’s 2% annual target.
«Powell’s constraint is that it’s difficult to judge how the macro picture will evolve with uncertainty around tariffs and the fiscal policy,» said Mohit Kumar, chief economist and strategist for Europe at Jefferies.
Markets fully price two 25 bps cuts from the Fed this year, but do not expect the first easing until June.
The euro traded 0.3% lower at $1.0399, while the pound fell 0.24% to $1.2413.
Bank lending to firms in the euro area picked up last month, indicating that rapid interest rate cuts have started to flow through to the real economy, European Central Bank data showed on Wednesday.
The yen strengthened slightly, leaving the dollar down less than 0.1% on the day at 155.38, after giving up some of this week’s safe-haven gains on Tuesday.
Japanese Finance Minister Katsunobu Kato and U.S. Treasury secretary Scott Bessent will cooperate on issues including forex, Kato said on Wednesday.
FEB. 1 IN FOCUS
Although tariffs did not materialise on Trump’s first day in office, attention has turned to Saturday when the U.S. president is expected to issue 25% tariffs on Canada and Mexico.
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