US dollar softens before looming Federal Reserve rate hike

The dollar edged further away from recent 20-year highs on Wednesday ahead of the US Federal Reserve policy meeting, at which the central bank is expected to raise rates by another 75 basis points to tame soaring inflation.

But moves in currency markets were modest as traders await the policy announcement at 1800 GMT.

Money markets are betting that the Fed will raise rates by 75 basis points (bps), with an outside chance of a larger 100 bps hike. Traders expect the Fed to take the rate to as high as 3.4 per cent by year-end to help bring inflation back to target.

Bets on oversized rate hikes helped push the dollar index to its highest level in almost 20 years earlier this month at 109.29, with the greenback currently up 2.3 per cent in July.

At 0758 GMT, the dollar index was down 0.1 per cent at 107.

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"Markets are taking a bit off the table before tonight's Fed meeting," said Simon Harvey, head of FX analysis at Monex Europe.

"Barring any imminent headlines on European energy or political developments I think we will see very limited ranges."

The euro edged 0.3 per cent higher to $1.0144 but failed to recoup much of Tuesday's 1.0 per cent slide, its biggest fall in over two weeks, after fears of a European recession escalated when Russia further cut gas supplies to Europe through the Nord Stream 1 pipeline.

Analysts said the focus in Europe remained on the gas supply situation and Italian yields, which have risen on Wednesday after rating agency S&P Global revised its outlook on Italy's rating to stable from positive.

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"We expect that EUR will struggle to move higher while gas prices remain this high," said Colin Asher, senior economist at Mizuho in a note.

Meanwhile, the Australian dollar dropped 0.2 per cent to $0.6926 even as year-on-year core inflation hit 4.9 per cent in June, well above the Reserve Bank of Australia's target, as the figure was not as high as some investors feared and some rate hike bets were pulled back.

Traders are now pricing in around an 86 per cent chance of a 50 bps rate hike by the RBA next week, and a 14 per cent of a more modest 25 bps hike.

The dollar was flat at 137 yen and against the safe-haven Swiss franc at $0.9628.

In cryptocurrencies, bitcoin was steady at $21,410.