FOREX-Dollar edges up from four-year low versus euro as traders await Fed decision

By Saqib Iqbal Ahmed

NEW YORK, Sept 17 (Reuters) - The dollar edged higher against the euro on Wednesday, rebounding from a four-year low hit in the previous session, as investors awaited a widely expected Federal Reserve interest rate cut later in the day.

Major currency pairs held to tight ranges, with traders reluctant to take big positions before guidance from the Fed on the policy outlook.

"Currencies are treading water in quiet trade ahead of this afternoon’s highly-anticipated FOMC meeting as FX traders sit on their hands and wait for clarity from the Fed," said Matthew Weller, global head of market research at StoneX.

MARKETS EXPECT QUARTER-POINT FED RATE CUT

The euro was 0.2% lower against the dollar at $1.18485, after rising to a high of $1.18785, its strongest since September 2021, on Tuesday.

The dollar index =USD, which measures the U.S. currency against six others, was up 0.1% at 96.76.

The Fed began a two-day meeting on Tuesday with a new governor on leave from the Trump administration, Stephen Miran, joining the deliberations, and a second policymaker at the table still facing efforts by Trump to oust her.

A federal appeals court on Monday blocked Fed Governor Lisa Cook's firing, paving the way for Cook, an appointee of former President Joe Biden, to participate fully in the policy meeting this week.

Markets expect a 25-basis-point rate cut on Wednesday, with rapidly softening labor market data being the key driver of the ramp-up in easing bets in recent weeks.

Traders expect some 68 basis points of Fed easing moves by year-end and a total of 147 bps by the end of 2026.

The dollar's sharp losses in recent days on rising expectations for rate cuts mean the buck could see a near-term rebound if the Fed signaled more caution with rate cuts going forward, analysts said.

"With traders already pricing in 80% odds of another 25bps interest rate cut in October, anything less than a full-throated endorsement of additional interest rate cuts could lead to a near-term bounce in the greenback," StoneX's Weller said.

MANY SEE FURTHER DOLLAR LOSSES IN STORE

Still, many market participants see further losses in store for the dollar. The index is down nearly 11% this year.

"If the Fed were to sound a little more hawkish this week, that could lift the dollar. But I'd argue the effect would be temporary, as doubts would linger over whether the Fed may need to accelerate its rate-cutting cycle," said Paul Mackel, global head of forex research at HSBC.

"That's because some U.S. employment indicators have clearly been cooling," he added.

U.S. single-family homebuilding and permits for future construction dropped in August amid a glut of unsold new houses and a softening labor market, shrugging off falling mortgage rates.

Meanwhile, sterling was little changed on the day at $1.36515, not far from 2-1/2-month highs after British inflation data matched expectations.

The Japanese yen JPY=EBS firmed to 146.205 per dollar, its strongest in eight weeks ahead of a Bank of Japan policy meeting, where the central bank is expected on Friday to stand pat on rates. Against the yen the dollar was last down 0.13% at 146.285.

The spotlight is on an October 4 vote where the ruling Liberal Democratic Party will elect a new leader to replace outgoing Prime Minister Shigeru Ishiba.

"This (a strong yen versus dollar) may be because the more moderate Shinjiro Koizumi is entering the LDP leadership race against Sanae Takaichi, who is seen as yen-bearish for her views on loose monetary and fiscal policy," said Chris Turner, head of forex strategy at ING.

Cryptocurrency bitcoin was down 0.7% at $116,055.