Dollar softens as focus turns to Fed decision on US rates due out on Wednesday
The dollar slipped against a basket of major currencies on Monday ahead of a spate of central bank meetings, starting with the US Federal Open Market Committee on Wednesday.
The dollar index, which tracks the greenback against six major currencies, edged down 0.1 per cent after a spike in the Canadian dollar.
The loonie gained 1 per cent following remarks from Bank of Canada Senior Deputy Governor Carolyn Wilkins that the bank was considering reducing its monetary policy stimulus.
An interest rate increase would be the first for Canada’s central bank in seven years.
The Canadian dollar is the fourth-largest component in the dollar index, which also tracks the US currency against the euro, Japanese yen, British pound, Swedish crown and Swiss franc. The loonie rose to its highest against the dollar since April 18.
The yen rose 0.5 per cent against the dollar, pushing its gains to more than 4 per cent versus the greenback since mid-May.
The losses of the dollar were limited, however, as investors almost universally expect the Fed to increase US interest rates this week while other central banks, including the Bank of England and Bank of Japan, which conclude policy meetings on Thursday and Friday, respectively, are expected to remain on hold.
Fed fund futures prices show traders see about a 96 per cent chance the US central bank raises overnight interest rates on Wednesday, according to CME Group’s Fedwatch tool.
The expected Fed rate hike, along with a more accommodative stance from the European Central Bank after last week’s policy meeting and an expectation for the Bank of England to stay on the sidelines because of political uncertainty, have helped the dollar fight off a wave of recent negative data on the US economy.
Sterling dipped 0.7 per cent after a more than 2 per cent drop following last week’s snap British elections that left the Conservatives short of a ruling majority and cast a cloud of political uncertainty over the country.
“The foreign exchange narrative is being dictated by the dynamics of (British Prime Minister) Theresa May’s negotiations in trying to form enough of a government so the Conservatives have the ability to rule,” said Juan Perez, currency strategist at Tempus Inc in Washington.
Sterling fell 0.7 per cent to US$1.2650. The euro rose 0.1 per cent against the dollar to US$1.1205.