Dollar finds legs ahead of Fed By Reuters

By Tom Westbrook

SINGAPORE (Reuters) – The dollar steadied on Wednesday as stronger-than-expected U.S. retail sales led traders to slightly reduce bets that the U.S. easing cycle will begin with an interest rate cut.

The Federal Reserve is expected to make its first interest rate cut in more than four years at 18:00 GMT, to be followed by a press conference half an hour later.

The dollar fell along with US July yields and at $1.1119 per euro is not far from the year’s low of $1.1201 as traders anticipate a rapid decline of more than 100 basis points of cuts of Christmas installments.

It briefly dipped below ¥140 in a holiday-shortened Asian session on Monday, but changed hands at ¥142.02 early Wednesday as a big week for the currency pair culminates with US central bank meetings and, Friday, from Japan.

August retail sales rose 0.1 percent in the U.S., overnight data showed, against expectations for a 0.2 percent contraction.

The GDPNow estimate, closely watched by the Atlanta Fed, was raised to 3% from 2.5% after the data. A rate cut is fully priced, with interest rate futures implying a 63% chance of a 50 basis point cut, after flirting with 70% a day earlier.

Traders say the Fed’s tone as well as the size of the rate cut will determine the next moves in the currency market.

“A dovish Fed on a substantial easing path should generally lead to a weaker dollar,” said Nathan Swami, head of currency trading at Citi in Singapore.

But an overly accommodative Fed, Swami said, could end up spooking markets if it appears the Fed is anticipating a more threatening economic downturn than expected, and in that case, risk-sensitive currencies and emerging markets may face headwinds on the contrary.

China’s stock, bond and currency markets resume trading on Wednesday after the Mid-Autumn Festival break, although Wednesday is a holiday in Hong Kong. Ahead of the onshore open, the yuan traded at 7.1083 per dollar offshore.

The Australian dollar traded firm at $0.6759 on Wednesday morning, while the New Zealand dollar rose 0.1%, helped by higher milk prices, to $0.6194.

Sterling, the year’s best-performing G10 currency, held steady at $1.3161, its rise driven by signs of a stable economy and persistent inflation. UK inflation data is due later in the day, while Thursday sees the Bank of England leave rates on hold at 5%, with a 35% chance of a cut.

Final European inflation figures are also due, however they are not expected to deviate much from August’s preliminary figures and so all eyes will be on the Fed.

“With markets betting on 41bp cuts, which is a far cry from realistic competitors (25bp or 50bp), volatility looks all but assured,” analysts at ANZ Bank said in a note to customers.