Dollar edges lower ahead of Fed meeting; yuan gains on support promises

The U.S. dollar edged lower Tuesday, amid caution ahead of the start of the two-day Federal Reserve policy meeting, while the Chinese yuan strengthened after Beijing pledged to step up policy support.

At 03:20 ET (07:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 100.985.

Dollar slips ahead of start of Fed meeting
The dollar has slipped slightly after weak U.S. business activity data released Monday played into the theory that the Federal Reserve will have limited headroom to raise interest rates any further after Wednesday’s widely expected hike.

A majority of economists polled by Reuters now expect Wednesday’s increase to mark the last increase of the central bank’s current tightening cycle.

That said, the dollar’s losses are minimal with traders wary of taking too strong positions given inflation remains above the Fed’s medium-term target.

“The reason why we warn against pursuing a full ‘risk-on’ rally in Rest of World (RoW) currencies is that the European economy looks weak and tomorrow’s FOMC meeting will probably see the Fed’s foot remaining firmly on the monetary brakes,” said analysts at ING, in a note.

Yuan surges as Beijing promises support
USD/CNY fell 0.6% to 7.1447 after pledges of support for the faltering Chinese economy from the closely watched Politburo meeting – the Communist Party’s top decision-making body.

Beijing promised ‘counter-cyclical’ measures to support the economy, and although specific details were lacking, these promises followed a series of recent measures, such as the easing of restrictions in the mortgage sector and the encouragement to buy cars and electronics.

“None of these seem to be a game-changer so far, but the market optimists are hoping that this new directive from the Politburo will be turned into powerful stimulus at the State Council level,” ING added.

The yuan also received help from buying by China’s state banks, according to reports.

Euro edges higher; German Ifo seen weakening
EUR/USD rose 0.2% to 1.1083, rebounding after slumping to a two-week low of 1.1059 earlier in the session after Monday’s weak eurozone business activity data for July.

The widely watched German Ifo business climate index is due later in the session and is expected to show a weakening in confidence in the eurozone’s most important economy.

That said, the European Central Bank is still set to increase interest rates by a further 25 basis points when it meets on Thursday.

Elsewhere, GBP/USD rose 0.2% to 1.2858, USD/JPY rose 0.1% to 141.54, ahead of a Bank of Japan meeting later in the week, AUD/USD rose 0.4% to 0.6764, helped by the positive tone emanating from China given the Aussie dollar often acts as a yuan proxy.