Dollar treads water as traders wait for Fed policy meeting

The dollar nursed losses against most currencies on Wednesday amid some speculation the U.S. Federal Reserve could take steps to curb a recent rise in bond yields at its policy meeting.

The Australian and New Zealand dollars pulled back slightly against the greenback but sentiment remained positive as economic activity resumes in both countries following the lifting of coronavirus restrictions.

The main focus is a Fed policy meeting later on Wednesday. While no major changes are expected, recent rises in yields have pushed up the dollar due to increasing signs the U.S. economy is stabilizing, but a full-fledged recovery  from the coronavirus outbreak is still distant.

Some analysts are playing down the chance the Fed will adopt yield curve control to guide 10-year Treasury yields lower, but uncertainty about the outcome of the Fed meeting could keep the dollar under pressure.

“The Fed can afford to wait and see on yield curve control because the U.S. economy has gotten past the crisis phase and only just entered the healing phase,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

“The markets got overly optimistic and are adjusting lower, but this is a good chance to buy the dollar on the dip.”

The dollar was little changed at 107.72 yen on Wednesday in Asia following a 0.6% decline in the previous session.

Against the British pound, the greenback traded at $1.2732, close to a three-month low.

The dollar bought 0.9512 Swiss franc on Wednesday in Asia after falling 0.7% on Tuesday.

The yield on benchmark 10-year Treasury notes was little changed at 0.8270% on Wednesday. Long-term Treasury yields fell on Tuesday and the yield curve flattened slightly as traders adjusted positions before the Fed meeting.

U.S. central bankers on Wednesday will also publish their first economic projections since the coronavirus pandemic set off a recession in February.

Estimates are expected to signal a collapse in output this year and near-zero interest rates for the next few years.

The Australian dollar pulled back from an 11-month high to trade at $0.6958, while the New Zealand dollar fell from its strongest level since late January and settled at $0.6961.

The Antipodean currencies have been on a stellar run against the greenback due to hopes for economic recovery, prompting some investors to book profits.

Some traders are worried about a deterioration in diplomatic relations between Australia and China, which has also weighed on the Aussie.

Elsewhere in Asia, the Chinese yuan and the Korean won drifted higher against the dollar, but trading was subdued overall as investors avoided big moves before the Fed’s meeting.

The euro traded at $1.1340. Against the pound, the common currency bought 89.10 pence, on course for a second day of gains.

Concerns about progress in trade talks between Britain and the European Union continue to hamper both the euro and the pound.

The EU’s chief Brexit negotiator, Michel Barnier, is scheduled to speak later on Wednesday, which may yield details that will help determine whether market sentiment will improve.