Currencies

Wednesday June 25, 09:40 AM
Forex - U.S. dollar edges higher in cautious trade ahead of U.S. rate decision

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LONDON (Thomson Financial) - The U.S. dollar edged higher against the euro in cautious trade as market players awaited the latest interest rate decision from the U.S. Federal Reserve's Federal Open Market Committee later on Wednesday.

Rates are fully expected to be left on hold and attention will focus on the accompanying statement. Speculation remains that the Fed will adopt a more hawkish stance that could signal a rate hike in the coming months in a bid to tackle the threat from inflation. A string of very weak U.S. data on Tuesday, however, highlighted the scale of the task facing the U.S. economy.

'Attention today will swiftly move to the outcome of the Fed FOMC meeting and the delicate balancing act needed in terms of weighing up inflation risks against worsening growth,' said Mitul Kotecha at Calyon.

The Fed will certainly not want to sound tough on inflation, but paving the way for higher interest rates may be tough to justify until there has been evidence that the worst is over for the U.S. economy.

This was certainly not the case Tuesday, when data included a 16-year low in the Conference Board measure of consumer confidence in June and an all-time low for the expectations component, as well as the biggest annual fall in house prices on record, as measured by the CaseShiller Index.

'On balance, the risk is skewed towards a rally in interest rate futures given the magnitude of rate hikes priced in, which in turn could leave the U.S. dollar under pressure over the short term,' Kotecha said.

Before the FOMC meeting, the U.S. dollar could come under pressure if further data releases are similarly weak, with durable goods orders and new home sales data due for release.

In Europe, euro zone industrial orders data will be watched for further signs of an accelerating economic slowdown in the region. German CPI numbers due this week should give a clue on the extent of the inflation problem.

Elsewhere, the pound weakened a touch, with attention focusing on the upcoming release of the latest CBI retail sales survey.

After official data last week showed a very sharp and unexpected jump in retail sales in May, many expect the CBI's more timely survey for June to show a correction lower. A strong report, however, would suggest the Bank of England could be set to raise interest rates over the coming months.

London 0818 GMT Tokyo 1:00 p.m. (0400 GMT)

U.S. dollar

yen 107.94 up from 107.78

Swiss franc 1.0418 up from 1.0409

Euro

U.S. dollar 1.5570 down from 1.5571

pound 0.7907 up from 0.7899

yen 168.10 up from 167.83

Swiss franc 1.6224 up from 1.6211

Pound

U.S. dollar 1.9689 down from 1.9703

yen 212.49 up from 212.38