Uncertainty over global central bank settings injected caution into financial markets and the dollar, cooling the U.S. currency's rally to multimonth highs. Those with views the Federal Reserve won't raise borrowing rates this year could be in for a rude awakening Wednesday when the central bank renders a policy update. The Fed's gathering this week still seems premature yet to raise rates given the patch of uncertainty and softness the economy has recently traversed. The Fed's statement, due at 2 pm ET Wednesday, could take note of stronger U.S. data and raise the curtain on a rate hike by year-end. Meanwhile, the yen rallied Tuesday as many reined in their high hopes for Japan to deliver stronger stimulus this week.
The loonie steadied after starting the week with a slide to its lowest in four months. A strengthening greenback and weakening oil prices have take a toll on a broad range of commodity currencies such as Canada's.
Caution descended on global markets Tuesday, the day Fed officials assemble for two days of high level talks on American monetary policy. No change in borrowing rates is expected Wednesday but a stronger hint of a possible rate hike in coming months would risk adding bullish fuel to the dollar's rally to March peaks on a trade-weighted basis. Any disappointment over Japan on Friday could limit scope for dollar strength.
The euro firmed above one-month lows against the dollar as profit-taking caught up with the U.S. currency's climb to multimonth highs on a trade-weighted basis. The big picture favors the dollar over the euro with market odds showing the Fed more likely than not to raise interest rates by year-end.
The yen caught a relief rally Tuesday as doubts surfaced in Japan's ability to meet markets' elevated expectations for action on Friday, uncertainty that weighed on global markets and gave the Japanese currency an added safe haven lift.
Sterling weakened toward three-decade lows after an influential member of the Bank of England's rate-setting committee sounded amenable to a U.K. rate cut as soon as bankers' next meeting on Aug. 4. Sterling has struggled anew in the wake of business surveys last week that took a record plunge and stoked recession fears.
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