Dollar falls in anticipation of the Federal Reserve meeting

US Treasury bond yields fell after reaching a 16-year high in the previous session

The dollar weakened and U.S. yields fell on Wednesday, hours before the Federal Reserve was expected to leave its policy rate unchanged and present its latest set of short-term interest rate forecasts.

The dollar’s strength against a basket of six other major currencies fell 0.35 percent after hitting its highest level since March last week.

After hitting a 16-year high in the previous session, the yield on benchmark 10-year Treasury bonds fell by 0.04 percentage points to 4.32 percent, while the yield on two-year bonds, sensitive to interest rates, fell by 0.05 percentage points to 5.05 percent. The yield varies inversely with the price.

On the stock markets, the Wall Street S&P 500 index gained 0.2 percent, with all sectors except the energy sector in positive territory. The tech-heavy Nasdaq Composite fell 0.2 percent.

Markets are reducing the 99 percent chance that rates will remain unchanged in the 5.25 percent and 5.5 percent range on Wednesday, according to data compiled by Refinitiv and based on interest rate derivatives.

Since the last Federal Reserve meeting in July, core inflation in the US has fallen from 4.8 percent to 4.3 percent, employment growth has slowed, and the unemployment rate has risen to 3.8 percent.

For investors, the main question is whether the Federal Reserve, led by its chairman Jay Powell, will be open to further increases before its policy moves to lower rates.

“We believe that the message that ‘further policy tightening may be appropriate’ is likely to be kept verbatim, as the minutes of the July meeting confirmed that ‘most participants continued to see significant upward risks to inflation,'” JPMorgan analysts said.

Liz Ann Saunders, chief investment strategist at Charles Schwab, said she hoped Powell would “leave the door open for further growth, as it has been in the past.”

“The lesson that Powell learned most seriously from the experience of the 1970s is that declaring victory and easing policy only to see the genius of inflation come out of the shadows again meant that [former Federal Reserve Chairman Paul Volcker] had to raise interest rates again.” Saunders said.

The comparison with the 1970s, when successive spikes in oil prices led to a second wave of inflation, has taken on new significance, as the price of Brent crude oil has risen by 30 percent over the past two months to about $95 per barrel, which is the highest ever this year..

In other stock markets, the regional Stoxx Europe 600 rose 0.9 percent in afternoon trading. London’s FTSE 100 index also rose 0.9 percent after UK inflation fell from 6.8 percent in July to 6.7 percent in August, surprising economists ahead of the Bank of England’s crucial rate-fixing announcement on Thursday.

Developers were among the biggest beneficiaries, with Taylor Wimpey and Persimmon shares up 5.2 percent and 4.8 percent respectively, and British Land up 3.9 percent.

Asian stocks fell: China’s CSI 300 fell 0.4 percent, Japan’s Topix fell 1 percent, and Hong Kong’s Hang Seng index lost 0.6 percent.

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