US Dollar struggles for traction as all eyes fix on Fed

Frankfurt (Jan 27)  The dollar struggled to gain traction on Wednesday as investors awaited the outcome of a Federal Reserve meeting for clues on whether bets on a single U.S. interest rate rise in 2016 are justified.

With investors largely in wait-and-see mode before the Fed, Australia's dollar was the biggest mover, hitting a three-week high after a measure of domestic inflation came in slightly higher than expected.

Most markets were choppy, with Asian bourses closing up on the day but European stock markets falling alongside oil prices.

Though the Aussie was up around 0.5 percent against its U.S. counterpart, other currencies seen as risky struggled.

The Swiss franc fell to its lowest level since the Swiss National Bank removed the cap on its currency just over a year ago, trading at 1.1063 francs per euro. Analysts said 1.10 francs had been an important level for the currency to break through.

"It's difficult to commit to positions, because one minute it's risk-on, the next it's risk-off," Altana Currency Fund manager Ian Gunner said in London.

"There are a lot of question marks over everything at the moment and people are just searching for answers."

The dollar index inched down 0.3 percent to 99.06, nursing a 0.3 percent loss recorded on Tuesday and staying well below a seven-week high of 99.799 set last Thursday.

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The euro was up 0.03 percent $1.0872, while the yen crawled up 0.22 percent to 118.67 against the greenback.

"I think (in the coming days and weeks) we're going to see general choppiness, and not a lot of direction - I don't think people are going to have a lot of confidence to really put weighty amounts behind ideas at the moment," Gunner added.

Wednesday's main focus will be on the statement released by the Fed after its Jan. 26-27 policy review. While the U.S. central bank is almost certain to keep interest rates unchanged, investors are keen to see its latest economic outlook, particularly given the turbulent start to the year.

With Fed fund futures implying just one rate hike this year, compared with four hikes according to Fed policymakers' own rate guidance, the risk is that anything the Fed says may be interpreted as hawkish.

"The market isn't expecting anything particularly hawkish today so obviously anything that did appear hawkish would certainly be a bit of a surprise and would give the dollar a bit of additional support," Rabobank currency strategist Jane Foley said in London.

"But I think the real question is: how dovish? How concerned are they (Fed policymakers) really about inflation and how much do global growth concerns feature in their discussions?"

More central bank policy decisions are coming up this week, with the Reserve Bank of New Zealand (RBNZ) announcing its decision in the European evening, and the Bank of Japan's (BOJ) policy statement due on Friday.