U.S. dollar consolidates gains after hitting 3½-mth high

Federal Reserve concludes a two-day meeting on Wednesday.

While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to raise borrowing costs next month, given signs of possible acceleration in the USA economy, and possibly two more times over the remainder of the year.

No fireworks are expected from Wednesday's policy statement at 2 p.m. ET.

Fed officials will hold a regular meeting this week. The Fed's forecasts published in September 2016 revealed that policymakers thought US short-term interest rates would be below 2% by the end of 2018 and below 2.75% by the end of 2019.

The dollar index is now trading at 92.33, down 0.12 percent so far today. But again, were inflation to consistently push beyond 2% - as last seen over 2006 and 2007 - the Fed would likely decide it needs to not only take its foot off the accelerator a little more quickly, but possibly tap on the brakes. Its gains makes gold priced in dollars more expensive for holders of other currencies, which could potentially subdue demand; a relationship used by funds to generate buy and sell signals from numerical models. On Tuesday, the Dow Jones Industrial Average fell 0.27 percent while the Nasdaq Composite rose 0.9 per cent.

Recently, however, renewed if cautious optimism about the economy's growth prospects appears to have given firms enough pricing power to nudge the Fed's preferred inflation measure, the personal consumption expenditures index, to 2% in March for the first time in a year. The dollar was underpinned by the outlook for a strong U.S. economy amid signs of slowdown elsewhere, especially in Europe.

On Wall Street, the S&P 500 gained 0.25 percent on Tuesday on positive comments by U.S. Trade Representative Robert Lighthizer on China, and Mexico's economy minister on the renegotiation of the North American Free Trade Agreement. Apple shares were up 4.4 percent. The company beat revenue and profit expectations in its March quarter, with its shares ending the regular session up 2.3 percent. But most economists expect a solid rebound, with the economy expanding at a 3 percent annual rate or better, in the current April-June quarter.

The greenback has risen to almost a 3-month high of Y109.675 against the Japanese Yen Tuesday afternoon, from an early low of Y109.253.

The Fed is reserving judgment on whether the tax cuts will yield such a supply-side benefit, though it's also shown no indication so far of shifting to a steeper tightening path than the two or three more increases this year that officials projected in March. A year ago, the 10-year yield was just 2.3 per cent.

German yields, dragged to six-week highs by the USA bond selloff, stood just below those levels.

USA construction spending dropped 1.7 percent in March, the biggest setback in 11 months, with weakness in a number of sectors including the biggest plunge in home building in nine years. It touched $1,301.51 on Tuesday, its lowest since December 29.

  • Zachary Reyes