Investing.com – The U.S. dollar fell on Wednesday ahead of the conclusion of the Federal Reserve’s latest interest rate-setting meeting, while the Japanese yen rose after the Bank of Japan tightened monetary policy.
At 05:20 ET (09:20 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.3% at 103.992, trading within a narrow range.
Dollar falls ahead of Fed decision
The central bank concludes its two-day policy-setting meeting later on Wednesday, and is widely expected to keep interest rates unchanged when it concludes the following day.
The U.S. central bank is widely expected to leave interest rates unchanged this week, but the dollar is showing signs of weakness as traders expect Federal Reserve Chairman Jerome Powell to pave the way for a rate cut at the U.S. central bank’s next meeting.
“Powell will almost certainly reiterate a dovish tone on inflation this time around, but he has often been the voice of a more dovish faction on the FOMC, and the press conference could generate some negative headlines for the dollar,” analysts at ING Bank said in a note.
According to CME Fedwatch, the general consensus is for a 25 basis point rate cut in September.
Sterling falls amid Bank of England uncertainty
In Europe, the euro fell 0.1% to 1.2826, ahead of Thursday’s meeting, which is seen as a close decision on whether the bank will keep interest rates steady or cut.
UBS expects the Bank of England to cut interest rates by 25 basis points tomorrow, saying in a note dated July 24 that “the main reason we expect the MPC to cut rates is the recent data.”
“First, headline inflation in June, at 2%, was fully in line with the Bank’s May forecast, despite upside surprises in April and May. Second, the overshoot in services inflation (5.7% in June versus the BoE’s 5.1% estimate) was largely driven by volatile and regulated components, which should not weigh on the medium-term inflation outlook – an assessment shared by several MPC members, according to the minutes of the June meeting.”
“Third, the July labour market report showed clearer signs of a slowdown in wage growth with regular private sector wages falling by 0.3 percentage points to 5.6% year-on-year in May, broadly in line with the Bank of England’s May forecast.”
The euro rose 0.1% to 1.0823, following data showing the euro zone economy grew by 0.3% in the three months to June, slightly above expectations.
In addition, growth in the euro area rose by 2.6% year-on-year in July, slightly above the expected 2.5%, while the “core” figure, which excludes volatile energy and food items, rose to 2.9% year-on-year.
“It will certainly take more than a marginal inflationary surprise to prompt markets to price in less than two ECB rate cuts by the end of the year, but today’s numbers could help EUR/USD consolidate support at 1.0800 ahead of the Fed risk event this evening,” ING added.
Yen rises after Bank of Japan rate hike
In Asia, the yen fell 1.4% to 150.66, with the yen gaining after the Fed raised its benchmark short-term interest rate by 15 basis points to around 0.25% – the upper end of market expectations.
It also said it would halve the pace of its purchases of Japanese government bonds — to 3 trillion yen ($19.5 billion) from 6 trillion yen by the first quarter of 2026.
The yen made strong gains in July, with USD/JPY down around 6.5%, as a combination of a pullback in the carry trade and suspected government intervention sparked buying in the currency.
The Australian dollar index fell 0.4% to 7.2256, as weak data and positive government comments boosted expectations for more stimulus measures in the country.
The US dollar index fell 0.7% to 0.6492, its lowest level in three months, driven mainly by some weak data for the quarter ended in June.
While headline CPI rose as expected in the quarter, the decline in core inflation has raised hopes for a moderation in inflation in the coming months, reducing the need for an interest rate hike by the RBA.
