Dollar Flat Ahead of Fed Policy Decision

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The dollar was almost flat against the yen and the euro in quiet Asia trade Thursday, as investors anxiously waited to see if the Federal Reserve would raise interest rates for the first time since 2006.

Around 0450 GMT, the greenback was at Y120.63, compared with Y120.58 late Wednesday in New York. The U.S. currency was unchanged against the euro, which was changing hands at $1.1297 midday from $1.1294 late Wednesday.

The WSJ Dollar Index, a measure of the dollar against a basket of major currencies, was unchanged at 87.98.

Market sentiment cleared up, with the solid performance of stock markets across the region brightening the mood. But investors largely sit on the sidelines ahead of the conclusion of the closely watched Federal Open Market Committee’s two-day meeting, which is scheduled to end later Thursday.

“In either event (of rate increase or not), the dollar will likely remain firm,” said Kyosuke Suzuki, head of FX and money market sales department at Societe Generale in Tokyo. Mr. Suzuki said the Fed will act this time in his main scenario, judging from comments by the central bank board members with influential voices on the FOMC.

The yield on the two-year U.S. Treasury note hit a fresh four-year high overnight. But “I don’t feel the market has fully factored in” the rate increase, thus causing moderate dollar buying supported by another gain in the U.S. yields assuming a decision to rates will start raising. This scenario will bring the dollar closer to the recent high of around Y121.40-Y121.50, said Mr. Suzuki.

But even if the Fed doesn’t act immediately, the FOMC will likely leave hawkish messages in its statement in a sign that the central bank will keep intact its stance to raise rates later this year. This may help pull the greenback down below the Y120-threshold, but the U.S. currency will likely be well supported around Y119.20-Y119.30, said Mr. Suzuki.

Mr. Suzuki warned the Fed’s inaction this time could indicate that it won’t raise rates within this year, amid lingering concerns about market volatility in China and emerging economies. “But the possibility remains extremely low.”

The benchmark Nikkei Stock Average was up 1.2% midday. The Shanghai Composite Index was last trading 0.5% higher.

The dollar showed muted reaction to Japan’s trade figures earlier in session. Japanese exports rose 3.1% from a year earlier in August, as a weak yen boosted the nominal value of outbound shipments, while they faced headwinds from a slowdown in China. The result compared with the median forecast of a 4.1% rise in a poll of economists by The Wall Street Journal and the Nikkei.

In the other currency trade pair, the euro was at Y136.28 from Y136.06 late Wednesday.

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