Dollar firm but softens against yen ahead of FOMC

TOKYO, Sept 20 – The dollar remained firm on Wednesday but softened slightly against the yen ahead of a much-anticipated rate decision by the Federal Reserve later in the day.

The US dollar index, which measures the greenback against a basket of rivals, stayed mostly flat at 105.13 as traders awaited the Fed’s rate decision.

Markets expect the Fed will almost certainly keep rates on hold at 5.25% to 5.50%, putting the focus on the central bank’s forward guidance.

Futures markets are pricing in a 30% likelihood of a quarter-point increase in November or a 40% chance it will be in December, according to CME FedWatch tool.

“We expect the FOMC to retain its forecast of one extra 25-bp hike by year-end, though it will not follow through with it in our view,” said Carol Kong, economist and currency strategist at the Commonwealth Bank of Australia.

Dollar/yen could see some upside pressure after a hawkish FOMC meeting, she added.

The yen last sat nearly 0.1% higher at 147.77 versus the greenback, off Tuesday’s low of 147.92 though hovering near the 10-month trough against the dollar ahead of the FOMC announcement.

Speculation increased about a possible sooner-than-expected exit from the Bank of Japan’s ultra-loose policy, but the central bank will most likely keep interest rates ultra-low on Friday and reassure markets that monetary stimulus will stay for the time being amid economic uncertainty.

Japan’s top financial diplomat, Masato Kanda, reiterated warnings on Wednesday, saying Japanese authorities are always in close communication on currencies with US and overseas policymakers while keeping a close watch on market moves with a “high sense of urgency”.

Meanwhile, the Australian dollar, a proxy for China’s growth, rose almost 0.1%, holding onto gains after minutes of the Reserve Bank of Australia’s latest policy meeting signaled more interest rate increases to come.

The New Zealand dollar picked up over 0.2% against the dollar near USD 0.5950.

The euro and sterling stood mostly unchanged in the Asian morning, at USD 1.0680 and USD 1.2391, respectively.

Market eyes will be on UK CPI released on Wednesday, the last bit of inflation data to squeeze in before the Bank of England makes its rate decision on Thursday.

In cryptocurrencies, bitcoin hovered around USD 27,210, after touching a three-week high on Tuesday.

(Reporting by Brigid Riley; Editing by Gerry Doyle)