By Olga Cotaga
London, July 28 – The euro retreated from its two-year high on Tuesday as dollar sales declined before a two-day Federal Reserve meeting, during which investors expect its outlook will be reaffirmed.
No monetary policy changes are likely, but traders are speculating about a change in emphasis in the Fed’s forward guidance at the meeting, which starts on Tuesday.
Some dollar weakness came amid political wrangling over the next U.S. fiscal rescue package. The Republican leadership of the U.S. Senate introducing a proposal for the next coronavirus relief package, a $1 trillion plan called the Heals Act, but concerns were still evident over the details.
“The notable highlight, which will reinforce concerns over the outlook for the U.S. economy, was the plan to cut the unemployment claim support from $600 to $200 per week, a larger cut than originally reported,” said Derek Halpenny, head of research at MUFG.
“Delay in getting a deal agreed will cause unavoidable damage to the real economy, given the high level of uncertainty it is now creating,” Halpenny said.
The euro was last trading down 0.3% at $1.1715, off the $1.1781 two-year high reached the day before. The dollar rose the same amount versus the pound and the Japanese yen.
The New Zealand dollar fell the most against the greenback, sliding 0.6% to 0.6644.
“Yesterday’s moves were pretty violent, and followed moves of a similar magnitude last week,” said Stephen Gallo, currency analyst at BMO Capital Markets, adding that there has been “some of the final pre-Fed positions adjusted into the early part of the Asian session today.”
The dollar had been tumbling since May and was dumped in recent days as flaws in the U.S. coronavirus recovery and crumbling yields sent investors elsewhere.
Most analysts say the reasons for the dollar’s decline, especially falling real yields, remain intact, but the pace of the drop probably warranted a pause – particularly with a Fed meeting and a U.S. spending package in the offing.
U.S consumer confidence and manufacturing data due at 1400 GMT will also provide evidence on the U.S. economic recovery.
Traders pushed the cost of one-month euro/dollar options to a four-month high on Tuesday, suggesting money managers were preparing for unexpected moves in the pair in coming weeks.
Elsewhere, the Turkish lira was close to record lows after it plunged 2% in minutes on Monday before reversing most of that fall. The lira has fallen about 7% against the euro in two months. It was virtually flat against the dollar .
(Reporting by Olga Cotaga)