Dollar Flat as Experts Suggest Fed Tightening Unlikely to Provide Boost

The dollar was flat Tuesday, and experts suggest that the greenback could struggle to advance as the improved pandemic backdrop may sour investor appetite for the safe-heavens including the greenback.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell 0.07% to 93.19

The U.S. dollar has been riding a wave of safe-heaven demand as investors contend with economic headwinds including the difficulties in China. But in the near term, “the U.S. dollar is expected to slip slightly lower as pandemic uncertainties gradually recede,” Desjardins said.  

While the Federal Reserve’s plan to tighten its monetary policy measures could help offset less favorable factors for the greenback, such as a wide trade deficit and a higher inflation, the boost to the dollar from Fed tightening isn’t expected to be as meaningful as many expect.

“The dollar is threatened with trouble on two fronts: a slowdown in economic momentum combined with falling inflation should put an end to speculation about interest rate hikes fairly quickly – perhaps even faster than we expect,” Commerzbank said.

The Federal Reserve kicked off its two-day meeting on Tuesday, and is expected to keep its benchmark rate unchanged when its delivers its monetary policy statement on Wednesday.

But with the Fed’s plan to taper largely priced in, a raft of updates to the central bank’s economic and interest rate projections are likely to be closely watched.

“The SEP [summary of economic projections] is likely to show an expectation for still solid growth and elevated inflation,” Jefferies said.  “The dots, meanwhile, are likely to show an array of opinions regarding the timing of the first rate increase.”