Dollar Drifts Lower Ahead of FOMC Decisions

The U.S. Dollar drifted lower against a basket of currencies on Tuesday ahead of several key pronouncements from the Federal Open Market Committee on Wednesday. The FOMC is expected to deliver its decision on interest rates, issue its monetary policy statement and release its economic projections.

December U.S. Dollar Index futures settled at 91.635, down 0.195 or -0.21%.

Fed policymakers are expected to hold the benchmark interest rate unchanged at<1.25 percent and announce their plan to begin reducing the central bank’s $4.5 billion balance sheet.

The Fed is expected to announce a lowering of monthly bond purchases, starting in October, when their two-day meeting ends on Wednesday. The Fed is also expected to leave the door open for a rate increase at their December 12-13 meeting. At the close on Tuesday, the futures markets implied traders saw a 58.3 percent chance of a rate increase at year-end, according to the CME FedWatch tool.

The biggest risk for the U.S. Dollar is if the Fed casts doubt on a December rate hike.

U.S. Equity Markets

The three major U.S. stock indexes rose on Tuesday as the Fed began two-days of monetary policy deliberations.

In the cash market, the benchmark S&P 500 Index settled at 2506.65, up 2.78 or + 0.11%. The blue chip Dow Jones Industrial Average closed the session at 22370.80, up 39.45 or +0.18% and the tech-based NASDAQ Composite finished the day at 6460.82, up 6.18 or +0.10%.

The S&P 500 was led higher by telecommunications and financials. The Dow was led by strong gains in Verizon and Goldman Sachs.

On Wednesday, stock market investors will be most interested in the details of the Fed’s plan to begin reducing its massive balance sheet and whether the Fed still believes it can raise interest rates in December.

Economic News

U.S. import prices posted their biggest gain in seven months in August amid a spike in petroleum costs. Import prices rose 0.6% versus an estimate of 0.4%.

In the housing industry, building permits came in at 1.30M, beating the 1.22M forecast. Housing Starts were 1.18M, slightly above the estimate.

The current account was a disappointing -123B, however, the previous report was revised to the better at -114B.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil settled slightly lower on Tuesday ahead of inventories reports from the American Petroleum Institute and the U.S. Energy Information Administration.

Both reports are expected to show a build in U.S. crude inventories as imports resume and refineries were still restarting after a recent shutdown in the Texas Gulf Coast region due to Hurricane Harvey.

Despite the slight setback, the market continued to remain supported ahead of Friday’s meeting between OPEC and non-OPEC producers. They are expected to reach a decision on whether to extend the supply cut program beyond March and to deepen the cuts.

Gold

Gold rebounded from a two-week low to post a modest gain on Tuesday in reaction to a weaker U.S. Dollar. Volume was light as investors prepared for the Fed’s monetary policy announcements on Wednesday.