Dollar eases as traders eye upcoming central bank decisions

© Reuters. Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration

By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The U.S. dollar eased against a basket of currencies on Monday but remained near a six-month high in muted trading as traders awaited interest rate decisions this week by the Federal Reserve, Bank of England and Bank of Japan.

"The plethora of event risk and central bank meetings coming up is keeping a lid on volatility, and with traders really not wanting to chase moves or take on significant risk before the FOMC, BoE, BoJ, etc.," said Michael Brown, market analyst at Trader X.

The U.S. dollar index, which measures the currency against six major counterparts, was down 0.1% at 105.15, not far from the six-month high of 105.43 touched on Thursday. The index rose for its ninth straight week last week, its longest winning streak in nearly a decade.

U.S. Treasury Secretary Janet Yellen said on Monday she saw no signs the U.S. economy is entering a downturn.

Resilient U.S. growth has fueled a rebound in the dollar in recent weeks though the rally will likely be tested by a gauntlet of data and Wednesday's Fed interest rate decision.

Data on Monday showed U.S. homebuilder confidence fell for a second month in September, with optimism dropping to the lowest since April as high interest rates cut into affordability for prospective buyers.

"The Fed should stay on hold in terms of rates, and personally I don't anticipate too much of a significant shift in terms of the statement, with a data-dependent tightening bias maintained," Brown said.

"The balance of risks does tilt a little to the dovish side in terms of the dots, given recent rhetoric, though this shouldn't significantly dent the dollar's longer-run bullish trend given the FX market's apparent focus on relative growth dynamics, where the U.S. remains by far the best of a bad G10 bunch," he said, referring to the Fed's interest rate forecasts to be released with the statement.

Fed fund futures show investors expect the Federal Reserve to keep interest rates on hold in the 5.25% to 5.5% range on Wednesday.

The euro was up 0.23% against the dollar at $1.0683. The European Central Bank raised interest rates to 4% last week, but said this hike could be its last.

The common currency rose to a new record high against the Swedish crown days before the Riksbank is expected to raise interest rates again.

Traders think Sweden's central bank is highly likely to raise interest rates on Thursday by 25 basis points to 4%, piling more pressure on the economy.

The yen was up about 0.15% against the dollar at 147.62 to the dollar, with traders out for a Japanese public holiday.

They broadly expect the Bank of Japan to leave rates on hold at -0.1% on Friday, but will watch closely for hints about the policy outlook after Governor Kazuo Ueda stoked speculation of an imminent move away from ultra-loose policy.

Traders remained on high alert for possible intervention to support the battered yen.

The pound was 0.02% lower at $1.23805. Traders see the Bank of England raising rates by 25 basis points to 5.5% on Thursday, in what could be its final hike.

In cryptocurrencies, bitcoin rose 1.02% to $26,806, a more than two-week high.