Dollar mixed as Fed meeting begins

NEW YORK (Dec 17)   The U.S. dollar fell against the yen but rose against the pound on Tuesday as the Federal Reserve kicked off its two-day policy meeting.

U.S. consumer prices were unchanged in November. Separately, home-builder confidence jumped in December to the highest level in four months. 

The Federal Reserve’s monetary policy is aimed at providing price stability and maximum employment. The central bank currently buys $85 billion a month in bonds and the question of when to reduce those purchases, which have been understood to weigh on the dollar, is likely to dominate debate at the Fed meeting. A decision is due Wednesday.

A decision to reduce bond purchases will be based on a substantial and sustained improvement in the job market, fiscal risks, and inflation, said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp.

Employment data, most recently the November nonfarm payrolls report, have pointed to an improvement in the labor market. Financial risks have diminished as the bipartisan budget deal is expected to face a final vote in the senate later this week , he said.

“The problem is that inflation numbers are very low,” said Franulovich. “Two out of the three things [are] in place, but the inflation angle would suggest that the Fed has plenty of time to be patient.” Westpac Banking Corp. doesn’t expect the Fed to announce a slowing of its asset purchases on Wednesday, but Franulovich noted that the odds of a taper have “undeniably risen.”

The ICE dollar, a gauge of the greenback’s strength against six rivals, traded at 80.060 versus 80.074 late Monday. The WSJ Dollar Index , which pits the dollar against a slightly wider basket, was little changed at 73.41 versus 73.38.

“The U.S. dollar is confined to fairly narrow ranges in mostly lackluster activity,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a post. “There have been several developments, but given the holiday mood, and ahead of tomorrow’s FOMC decision, one should not expect much.”

The dollar  fell to ¥102.67 from ¥103 late Monday.

The British pound  fell to $1.6265 from $1.6304 late Monday. Data released Tuesday showed that the annual rate of U.K. inflation fell to 2.1% in November, its lowest level in four years, from 2.2% in October.

The euro sat at $1.3765 versus $1.3764 late Monday.