Dollar Index Closes at 101.88 Ahead of Central Bank Decision Week
Key Facts
The dollar index closed at 101.88 points on October 26, up from 101.475 points the previous day, according to EL7 data. The move came on the eve of the Federal Reserve’s Federal Open Market Committee meeting, scheduled for October 27 and 28, in a week when major central banks are making interest-rate decisions. In early trading on Tuesday, the dollar rose to 157.65 yen from 157.50, while the euro slipped to $1.1173 from $1.1176, according to the Associated Press. The moves put the U.S. currency and the Fed’s decision at the center of market attention this week. The Fed chair will hold a news conference on October 28 after the committee meeting.
The Fed enters the meeting after raising its key interest rate by a quarter of a percentage point in September to about 3.9%, its first increase in three years, according to the Associated Press. The September statement described economic activity as expanding at a strong pace, while noting that inflation remained elevated. The statement also reaffirmed the committee’s goal of returning inflation to 2%. Economists and investors expect policymakers to leave interest rates unchanged at the end of Wednesday’s meeting, according to the Associated Press. That remains an expectation ahead of the decision, which the committee will issue after its two-day meeting.
Ahead of the meeting, currency markets were also focused on U.S. bond yields. The 10-year Treasury yield stood at 4.974%, while the 30-year yield was 5.299% on October 26; both were near their lowest levels in a month, according to Reuters via Investing.com. An analyst at National Australia Bank said moves in the U.S. bond market were driving the dollar’s broader performance. He added that falling yields and narrowing yield spreads between the United States and major Group of Ten economies had eased upward pressure on the currency. He said: "The market is responding to some extent to the decline we have seen in Treasury yields, and to the fact that yield spreads between the United States and other major G10 economies are narrowing."
This week’s monetary-policy meetings are spread across major central banks. According to Reuters, markets were expecting the Fed, the European Central Bank and the Bank of Japan to hold rates steady, while pricing in the possibility of increases by the Bank of Canada and the Reserve Bank of New Zealand. The Bank of Japan will meet on October 29 and 30, according to its official schedule. Its monetary-policy statement and Outlook Report are due on October 30. An analyst at Pepperstone said guidance from central banks on the subsequent policy path could matter more to markets than this week’s decisions themselves.
The Pepperstone analyst added that markets may need to reprice the forward interest-rate curve in response to that guidance. He said: "Forward guidance may matter more than the decisions themselves," adding that "markets may need to reprice the forward interest-rate curve." This comes in a week when three banks are expected to hold rates, while increases remain possible at the Bank of Canada and the Reserve Bank of New Zealand, according to Reuters. The Fed’s decision follows its September increase to about 3.9%. Its meeting is scheduled to conclude on Wednesday, with a news conference the same day.
The U.S. data calendar includes a key release on October 29, when the Bureau of Economic Analysis publishes its advance estimate of third-quarter gross domestic product, along with September personal income and spending data. Both reports are scheduled for 8:30 a.m., according to the bureau’s calendar. The income and spending data include personal consumption expenditures figures, among other components. The releases follow the Fed’s scheduled decision on October 28, putting them among the next U.S. data points on this week’s calendar. The same day, the Bank of Japan’s meeting begins and is scheduled to continue through October 30.