Dollar Edges Lower, But Retains Strength Against Yen Ahead of Fed Meeting

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By Peter Nurse

Investing.com - The U.S. dollar edged lower Monday, but still hit a five-year high against the Japanese yen, at the start of a week that includes a number of key central bank policy-setting meetings, in particular the Federal Reserve. 

At 3:10 AM ET (0810 GMT), the US Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 98.993, not far off its best level since May 2020.

The highlight of a busy week of central bank meetings will be that of the Federal Reserve, which is widely expected to announce its first interest rate hike since 2018 on Wednesday.

The uncertainty caused by the war in Ukraine has virtually ruled out a hike of 50 basis points, but with consumer inflation running at 7.9%, the largest annual increase in 40 years, the Fed has made clear its intention to lift interest rates, and a 25-basis-point hit looks likely. 

In contrast, the Bank of Japan is set to remain dovish at its meeting this week as policymakers try to boost the country's weak economic recovery from the pandemic.

USD/JPY rose 0.4% to 117.75, just below its highest level since January 2017.

“The yen is trading more like a carry-play and less like a risk-off haven,” said Marc Chandler, Chief Market Strategist at Bannockburn Global Forex, in a note.

EUR/USD rose 0.3% to 1.0941, buoyed by optimism that talks between Russia and Ukraine to end the conflict may be making some progress after U.S. Deputy Secretary of State Wendy R. Sherman said Sunday that Russia showed signs it might be willing to have substantive negotiations.

That said, the euro remains under pressure as the fighting in Eastern Europe continues and threatens to cause even more diplomatic frictions with the U.S. claiming the Russians have asked the Chinese for military help.

“Speculators in the futures market have amassed the largest net long euro position since the middle of last year,” added Chandler. “But the fog of war and the anticipated hike by the Fed on March 16 keeps the euro on the defensive.”

Elsewhere, GBP/USD rose 0.1% to 1.3049, with the Bank of England expected to hike rates for the third time since December after its meeting on Thursday, with consumer price inflation in the U.K. climbing to an almost 30-year high in January at 5.5%.

AUD/USD dropped 0.5% to 0.7252, after the recent strong rally due to higher commodity prices.

USD/CNY rose 0.3% to 6.3592, with the Chinese yuan weighed by another outbreak of COVID-19, prompting the authorities to place 17.5 million residents of the technology hub of Shenzhen in lockdown.

USD/RUB rose 0.7% to 115.1000, with International Monetary Fund Managing Director Kristalina Georgieva stating that a Russian sovereign default is no longer improbable following the Western sanctions levied on Russia and its banks in the wake of the invasion of Ukraine.