Dollar Rallies Ahead of Fed Policy Meeting

The dollar index rallied this morning ahead of this week’s Federal Reserve policy meeting, which commences this afternoon. This is largely a result of investors trimming bets against it, with the expectation that the central bank will maintain its stimulus programme having already been priced in.

US Dollar Index Oct 29 2013 Source: FXstreet

US Dollar Index Oct 29 2013
Source: FXstreet

The dollar was also boosted somewhat by a stabilisation in U.S. Treasury yields coupled with an expected increase in demand at the month’s end.

The dollar index has fallen about 1% this month, on top of a 2.3% drop in September, largely because many investors expected the Fed to start tapering its bond buying programme in September. It is now likely to maintain this programme at the current level until next year.

It is unlikely that the dollar will fall further if the Fed announces that it will wait for more evidence of how badly Washington’s debt ceiling battle has hurt the U.S. economy before deciding on whether to reduce stimulus.

With the dollar already low, it is less susceptible to bad economic news, there is a good chance that it will rally if US data begins to beats expectations again.

The decline in the dollar has seen the euro surge to a two-year high of $1.3833 on Friday, although it looks unlikely that it will go any higher, as the ECB may choose to intervene to help exports. Meanwhile, the Australian dollar has fallen back from a four month high, hit last Wednesday, after the Reserve Bank of Australia chief attempted to talk it down.