The U.S. Federal Reserve is set to raise rates for the first time since the pandemic at its meeting which concludes Wednesday, with traders looking for indications about the pace of future rate hikes.
Markets anticipate a 25 basis point rise at this meeting, according to the CMEs Fedwatch tool, but pricing has risen to indicate a 70% chance of a larger 50 basis point hike at its subsequent meeting in May, due to concerns about inflation.
“We think the statement and chair Powells press conference after the meeting will be influential in terms of market pricing for a 50 basis point rise in May and beyond, and that will impact the U.S. dollar intraday,” said Carol Kong, an FX strategist at Commonwealth Bank of Australia.
The dollar index, which measures the greenback against six major peers was at 99.108, not far off the 99.415 touched a week ago, its highest level since May 2020.
The yen was at 118.37 per dollar on Tuesday morning, after tumbling sharply in recent sessions as the contrast between rising benchmark rates in the United States and low rates in Japan becomes ever more apparent as the Fed begins to tighten.
The return of risk sentiment to markets, partly on the back of hints of a negotiated end to the war in Ukraine, has also taken away some of the support for the safe-haven Japanese currency.
Russian and Ukrainian delegations held a fourth round of talks on Monday but no new progress was announced. Discussions were due to resume on Tuesday.
The euro was fairly steady at $1.0947.
Traders were also watching the Chinese yuan which weakened to a one-month low against the dollar on Monday, breaching a key threshold, pressured by rising expectations of monetary policy easing and worries over the fast spread of locally transmitted coronavirus cases, which caused lockdowns in some cities.
The offhsore yuan was softer at 6.398 per dollar, though the Peoples Bank of China defied market expectations by keeping a key interest rate unchanged on Tuesday.
The Australian dollar was under pressure at $0.7190, having tumbled 1.5% on Monday, hurt by a halt to the surge in commodities prices which sent it higher earlier in the month.
Kon said the situation in China was also weighing on the Aussie.
Sterling was also beaten down at $1.3005, while in the world of cryptocurrencies, bitcoin was down 1.7% at around $39,000
