The euro on Wednesday strengthened against the dollar as traders prepared for the possibility that the Federal Reserve will flag weak U.S. economic data.
Any mention of sluggishness in the U.S. economy in a statement that's to be released following Wednesday's Fed meeting could push back the currency market's expectations for when a rollback of post-crisis stimulus measures would begin.
That could further pressure the dollar, which has strengthened for much of the year amid the belief that the Fed will be first among the world's major central banks to tighten monetary policy. That belief has been thrown into doubt.
While Fed Chairman Ben Bernanke in May first outlined a timeline and prerequisites for scaling back $85-billion-a-month worth of bond purchases--a move that roiled financial markets--Fed officials later emphasized that any tapering would be contingent on the performance of the U.S. economy and continued jobs growth.
The euro rose to as high as $1.3301 against the dollar, just shy of Tuesday's one-month high of $1.3302. By 1034 GMT, the euro was trading at $1.3260 against the dollar, compared with $1.3263, late Tuesday in New York, according to trading system EBS.
The Fed statement is scheduled for release at 1800 GMT. Ahead of that, at 1230 GMT, the U.S. will report the first reading of gross domestic product growth in the second quarter. Economists expect that GDP growth slowed in the period, to 0.9% compared with 1.8% in the first quarter.
There are other signs that the U.S. economy is softening: consumer confidence fell in July and retail sales for June came in well below expectations.
"If (weak data) is mentioned in the statement, speculation about the very imminent tapering will be cut back and could put the dollar under pressure," said Lutz Karpowitz, a foreign-exchange strategist at Commerzbank in Frankfurt.
The euro has gained more than 2% against the dollar since the start of July as traders' conviction about a quick end to stimulus has ebbed.
While analysts and traders are on watch for signals from the Fed on the U.S. economy, they say it's unlikely that European Central Bank will change its outlook at its meeting on Thursday.
"We know there will be some tapering from the Fed and no change in monetary policy stance from European Central Bank Thursday," Mr. Lutz said.
With the inflation rate in Europe below the ECB's 2% target, ECB officials are likely to reiterate their intention to keep official interest rates at current record-low levels, or even reduce them further, for an extended period.
The ECB began forward guidance on interest rates at its July 4 meeting, and traders don't expect any changes to the guidance at Thursday's meeting.
Elsewhere, the dollar fell to a one-month low against yen, while the Australian dollar was flat following Tuesday's selloff amid rising expectations that the country's central bank will need to continue cutting interest rates over the next year to support a faltering economy.
At 1037 GMT, the dollar was at Y97.65 against the yen, compared with Y98.05, while the euro was at Y129.48, compared with Y130.02.
The pound was trading at $1.5191 against the dollar, compared with $1.5241 late Tuesday in New York. The Wall Street Journal Dollar Index, which tracks the U.S. dollar against a basket of major currencies, was at 74.12 from 74.122.
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Any mention of sluggishness in the U.S. economy in a statement that's to be released following Wednesday's Fed meeting could push back the currency market's expectations for when a rollback of post-crisis stimulus measures would begin.
That could further pressure the dollar, which has strengthened for much of the year amid the belief that the Fed will be first among the world's major central banks to tighten monetary policy. That belief has been thrown into doubt.
While Fed Chairman Ben Bernanke in May first outlined a timeline and prerequisites for scaling back $85-billion-a-month worth of bond purchases--a move that roiled financial markets--Fed officials later emphasized that any tapering would be contingent on the performance of the U.S. economy and continued jobs growth.
The euro rose to as high as $1.3301 against the dollar, just shy of Tuesday's one-month high of $1.3302. By 1034 GMT, the euro was trading at $1.3260 against the dollar, compared with $1.3263, late Tuesday in New York, according to trading system EBS.
The Fed statement is scheduled for release at 1800 GMT. Ahead of that, at 1230 GMT, the U.S. will report the first reading of gross domestic product growth in the second quarter. Economists expect that GDP growth slowed in the period, to 0.9% compared with 1.8% in the first quarter.
There are other signs that the U.S. economy is softening: consumer confidence fell in July and retail sales for June came in well below expectations.
"If (weak data) is mentioned in the statement, speculation about the very imminent tapering will be cut back and could put the dollar under pressure," said Lutz Karpowitz, a foreign-exchange strategist at Commerzbank in Frankfurt.
The euro has gained more than 2% against the dollar since the start of July as traders' conviction about a quick end to stimulus has ebbed.
While analysts and traders are on watch for signals from the Fed on the U.S. economy, they say it's unlikely that European Central Bank will change its outlook at its meeting on Thursday.
"We know there will be some tapering from the Fed and no change in monetary policy stance from European Central Bank Thursday," Mr. Lutz said.
With the inflation rate in Europe below the ECB's 2% target, ECB officials are likely to reiterate their intention to keep official interest rates at current record-low levels, or even reduce them further, for an extended period.
The ECB began forward guidance on interest rates at its July 4 meeting, and traders don't expect any changes to the guidance at Thursday's meeting.
Elsewhere, the dollar fell to a one-month low against yen, while the Australian dollar was flat following Tuesday's selloff amid rising expectations that the country's central bank will need to continue cutting interest rates over the next year to support a faltering economy.
At 1037 GMT, the dollar was at Y97.65 against the yen, compared with Y98.05, while the euro was at Y129.48, compared with Y130.02.
The pound was trading at $1.5191 against the dollar, compared with $1.5241 late Tuesday in New York. The Wall Street Journal Dollar Index, which tracks the U.S. dollar against a basket of major currencies, was at 74.12 from 74.122.
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