LONDON (Reuters) – The euro rose on Tuesday as the dollar weakened, with investors betting that growth concerns will prompt the Federal Reserve to slow its pace of interest rate hikes at this week’s meeting.
A rout on Wall Street following a spate of weak data globally has strengthened the view that the Fed’s widely-expected rate hike on Wednesday will usher in a slowdown, or even a pause, to three years of steady rate increases.
The prospect of a “dovish rate hike” is keeping the dollar – this year’s best performing major currency – in check.
That is helping the euro, which on Tuesday was up 0.2 percent at $1.1373, having recovered all of its losses from Monday when it was hit by weak euro zone data.
The European Central Bank’s assessment last week that the balance of risks was moving to the downside, combined with signs that protests in France are beginning to weigh on business, means that euro appreciation is still a few months away, according to Goldman Sachs analysts.
Markets will scrutinise the Fed’s two-day policy meeting, which starts Tuesday, for its sense of how the economy is holding up amid a U.S.-China trade conflict and global financial market volatility.
“We expect the trade-weighted dollar to remain flat today, with a more meaningful catalyst for larger USD moves being the FOMC meeting tomorrow,” said ING FX strategist Petr Krpata.
The mood on Tuesday was less positive for the greenback with the dollar index 0.2 percent lower at 96.931 after losing 0.4 percent on Monday.
Last week, the dollar enjoyed its best weekly performance since September, reaching an 18-month high. The euro weakened after the European Central Bank cut inflation and growth forecasts and struck a cautious tone about the outlook for the world economy.
It may not be all gloom for the greenback. Some analysts think dollar strength can return if the Fed remains relatively confident about next year’s monetary tightening path.
“Personally, I think the Fed will continue to normalize policy next year and I don’t think it will send the US economy into recession,” said ACLS analyst Marshall Gittler.
“An economy where there are more job offers than unemployed persons doesn’t need such super-stimulus. That’s why I remain bullish on the dollar,” he added.
In a tweet overnight, U.S. President Donald Trump took another swipe at the Fed saying it was “incredible” for the central bank to even consider tightening given the global economic and political uncertainties.
The markets, however, looked past Trump’s now-familiar comments on the Fed.
The yen gained about 0.3 percent on the dollar as investors’ fears of slowing global growth increased demand for safety assets. The Swiss franc, another safe haven, also tacked on 0.2 percent.
Sterling, which has been heavily sold off in the past few months on Brexit uncertainty, held steady at $1.2653.
The kiwi firmed to $0.6845, buoyed in part by improved business confidence data.