Dollar edges higher, off lows ahead of Federal Reserve meeting

© Reuters.

By Peter Nurse 

Investing.com - The U.S. dollar edged higher in early European trade Tuesday but has struggled to climb much above recent five-week lows ahead of the start of the latest Federal Reserve policy-setting meeting.

At 04:05 ET (08:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 103.025, having earlier fallen below 103 for the first time since mid-February.

The ongoing turbulence in the banking sector has weighed upon the U.S. dollar, as traders have begun to price in the expectation that this banking stress will keep the Federal Reserve from hiking rates much further, or at all, later in the week.

The Fed unveiled an enhanced, seven-day dollar swap late on Sunday to try and ease funding stress in global markets.

Although the use of this facility has been limited, the rush to add liquidity into the monetary system is "the most overt sign" of financial stress and a clear negative for the dollar, said Alan Ruskin, chief international strategist at Deutsche Bank.

Aside from Wednesday's interest rate decision - with a hike of 25 basis points the current market favorite - markets will also be looking to hear what the Fed will say about its $8.6 trillion balance sheet, which has started to expand again.

EUR/USD edged higher to 1.0716, ahead of the release of the German ZEW survey of economic sentiment for March, which is expected to show a drop to 17.1 from 28.1, weighed by the banking unrest.

The European Central Bank increased interest rates by 50 basis points last week, but the uncertainty in the banking sector could limit the number of hikes the central bank authorizes this year.

"Clearly financial stability tensions might have an impact on demand and might actually do part of the work that would otherwise be done by monetary policy and interest rate hikes," European Central Bank President Christine Lagarde told European lawmakers on Monday.

GBP/USD fell 0.2% to 1.2251, ahead of the latest Bank of England meeting on Thursday, at which it is expected to raise interest rates for the 11th meeting in a row.

That said, the British public's expectations for inflation have fallen, the Bank of England said in a survey it published on Friday, suggesting that the central bank is close to ending its hiking cycle.

AUD/USD traded 0.4% lower at 0.6690, after the minutes of the Reserve Bank's March meeting showed that policymakers were considering an eventual pause in interest rate hikes.

USD/JPY rose 0.4% to 131.85, with the yen handing back some of its recent gains that were based on its safe haven status, while USD/CNY fell 0.1% to 6.8743.