Fed-driven dollar rally fades, focus shifts to ECB meeting

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© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this photo illustration© Reuters. FILE PHOTO: U.S. Dollar banknotes are seen in this photo illustration

By Tomo Uetake

TOKYO (Reuters) – The dollar slipped back from three-week highs against the yen on Thursday, quickly erasing gains made after the Federal Reserve took a slightly more hawkish policy tone in signaling two more rate hikes by year-end thanks to a solid outlook for the world’s biggest economy.

The greenback’s bounce faded as traders booked profits before the European Central Bank’s meeting later Thursday, where policy makers are seen discussing the timing of winding down the ECB’s 2.55-trillion-euro bond-purchase program.

The dollar last traded at 110.20 yen , down slightly on the day, having lost steam after hitting a three-week peak of 110.85 shortly after the release of the Fed’s latest policy statement.

The euro was almost flat at $1.1797 (), bouncing back from $1.1725 hit after the Fed’s decision and edging near last week’s high of $1.1840.

“In an increasingly uncertain world, U.S. monetary policy remains reassuringly boring,” said Stefan Kreuzkamp, chief investment officer at Deutche Bank’s asset management arm DWS.

“Policymakers painted a generally upbeat picture of the U.S. economy’s prospects. Despite ongoing trade frictions, both we and the Fed expect (U.S.) growth to persist above trend at least through next year.”

As widely expected, the Fed lifted key overnight borrowing costs by a quarter percentage point for a second time this year, to between 1.75 and 2.00 percent.

It also ended its pledge to keep rates low enough to bolster the economy for “some time” and signaled it would tolerate above-target inflation at least through 2020. Policy-makers projected two more rate increases by the end of this year, compared to one previously.

The initial market reaction to the slightly more hawkish Fed tone quickly faded off, with the focus shifting to the ECB’s policy review later in the global day.

Although the ECB is widely expected to stand pat this month, some traders speculate it may offer clues on its intentions to begin tapering its bond purchases this year. Others reckon the policy makers may refrain from signaling changes to ECB’s stimulus program given Italy’s political plight and a recent spate of disappointing data in the euro zone.

Some emerging market currencies could come under pressure on worries higher U.S. rates might prompt fund outflows to the United States.

Developing countries with large external financing needs are particularly vulnerable to rising dollar funding costs.

The South African rand , hit lately by weak economic data, slipped to a six-month low of 13.44 per dollar on Wednesday and last stood at 13.3200 per dollar.

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