Dollar Retreats as Investors Eyed Fed's Policy Meeting

The dollar lost some of its overnight gains against the yen with investors adjusting their positions ahead of the Federal Reserve's anticipated policy meeting. The Fed is expected to initiate an easing cycle with a potential interest rate cut. Market reactions will hinge on the Fed's tone and actions taken.

The dollar lost some of its overnight gains against the yen on Wednesday as investors adjusted positions ahead of an anticipated policy meeting by the Federal Reserve. The expectation is that the Fed will initiate a U.S. easing cycle, potentially making its first interest rate cut in over four years at 1800 GMT, with a 63% probability of a 50 basis point cut being priced in by the markets.

Since July, both the dollar and U.S. yields have declined, with the dollar currently trading at $1.1124 per euro, close to the annual low of $1.1201. This comes in anticipation of the U.S. easing at a rapid pace, with over 100 basis points of cuts projected by December. The yen, which has surged more than 12% since July, is also making gains as the Bank of Japan continues to hike rates while the Fed prepares to cut.

Elsewhere, the Australian and New Zealand dollars showed tentative strength ahead of the Fed's meeting, while China's yuan remained steady post-holiday. British inflation metrics provided a boost to sterling, the best performing G10 currency of the year. European inflation figures confirmed a steady rate of 2.2% in August, keeping all eyes focused on the Fed's forthcoming decisions.

(With inputs from agencies.)