Fed might taper bond purchases, dollar value stabilises
August 3, 2021

Fed might taper bond purchases, dollar value stabilises

The dollar stabilised near multi-week highs as traders turned cautious ahead of the Federal Reserve’s two-day policy meeting, which could potentially provide hints of plans to start tapering its bond purchases.

So far Fed officials, led by Chair Jerome Powell, have stressed that rising inflationary pressures are transitory and ultra-easy monetary settings will stay in place for some time to come.

However, recent economic data has raised concerns that price pressure could force an earlier stimulus withdrawal.

“That is exactly what makes tomorrow’s Fed meeting so interesting: market participants simply cannot be certain which aspect will weigh more heavily on the Fed’s mind,” Commerzbank analyst Esther Reichelt wrote in a note to her clients.

Nearly 60% of economists in a Reuters poll expect a tapering announcement in the next quarter.

Investors are hoping that U.S. retail sales and a manufacturing survey later on Tuesday will give clues as to what to expect from the Fed’s statement and news conference on Wednesday.

In the meantime, prudence is palpable across trading floors.

“Over in the FX arena, most pairs are in a stalemate, with currency traders appearing reluctant to take on new positions ahead of what promises to be an eventful FOMC meeting”, Marios Hadjikyriacos, an investment analyst at brokerage XM, said.

The dollar index edged lower in the Asian session and at 1048 GMT was up 0.06% at 90.54, hovering near multi-week highs.

Yields on benchmark 10-year U.S. Treasuries were at 1.49%, well below the 1.60% level at which they were trading toward the beginning of June.

The euro was flat against the dollar at $1.2122, just above a one-month low of $1.2093 it hit last week.

No noticeable moves came after data showed the euro zone’s unadjusted trade surplus was almost five times higher in April than a year earlier, but still smaller than expected.

On the trade front, the head of the European Commission announced that the bloc and the US had resolved a 17-year dispute over aircraft subsidies.

The Australian dollar slipped to $0.7693 after minutes from the Reserve Bank of Australia’s last meeting showed the bank was prepared to keep buying bonds even though the economy has recovered its pre-pandemic output.

The impact of Britain and Australia announcing a trade deal was still unclear, but the agreement is expected to benefit Australian farmers.

Sterling lost about 0.2% against the dollar at $1.4077.

In cryptocurrencies, bitcoin slipped just below the $40,000 bar on Tuesday and traded below its 200-day moving average after finding support from the promise of fresh investment from major backer MicroStrategy and from Elon Musk.

Tesla boss Musk on Sunday flagged that the carmaker could resume transactions using the token if miners can use cleaner energy to process them.

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