By Saqib Iqbal Ahmed and Samuel Indyk
NEW YORK, Sept 16 (Reuters) - The dollar held steady near a two-week high on Wednesday ahead of a Federal Reserve decision that traders expect will mark the first in a series of U.S. interest rate hikes.
Market participants are betting heavily that Fed policymakers will lift their benchmark rate by a quarter of a percentage point, to a 3.75%-4% range, and signal further tightening ahead.
On Wednesday, most major currency pairs traded in a tight range as investors
were hesitant to place large directional bets ahead of the Fed decision.
The dollar index has climbed nearly 1% over the past five sessions, but it remains unclear whether the Fed's decision will extend the rally or trigger a reversal, with strategists split on which way it will break.
"Even though a hike is close to being fully priced, we could see some dollar strength (if they raise interest rates)," said Kirstine Kundby-Nielsen, senior FX analyst at Danske Bank.
Benjamin Ford, researcher at macro research and strategy firm Macro Hive, on the other hand, expects the Fed decision to be net-negative for the dollar, though in a contained fashion.
"The market is asymmetrically hawkish," Ford said. "They want the Fed to deliver four hikes into mid-2027 and two by year-end. So, it's likely hard for them to add to front-end USD bullishness."
"As a result, we could see USD down a touch this evening on an outcome that it is less hawkish than the market expected," Ford said.
The euro, down 0.1% at $1.1534, was not far from Monday's one-month low of $1.1523. Sterling was down 0.2% at $1.3455 after British inflation accelerated to a five-month high in August, a day before the Bank of England is expected to leave rates steady. [GBP/]
The dollar index, which measures the currency against major peers, was up 0.1% at 99.71, near its two-week high of 99.865.
YEN TEST
The yen, which started September strong on a hawkish shift in expectations for Japanese interest rates, joint intervention by Japan and the U.S., and speculation that Japanese investors are repatriating capital, has floundered in recent sessions as the dollar has firmed.
Traders see an 80% chance that the Bank of Japan will hike rates on Friday, LSEG data show, and have priced in two 25-basis-point hikes by the end of January.
"The yen's path will continue to depend heavily on interest rate differentials," David A. Meier, economist at Julius Baer, said in a research note.
"We recently revised our USD/JPY forecasts to 155, reflecting some scepticism that the central bank can ultimately satisfy the pace of tightening currently priced in by markets," he added.
A long rally in China's yuan has lost momentum at around 6.71 to the dollar, but the currency is holding its gains despite a widening gap between low Chinese yields and rates elsewhere. [CNY/]
In cryptocurrencies, bitcoin was little changed at $75,742, a day after tumbling 4% when the U.S. Senate did not advance comprehensive cryptocurrency legislation — a setback to digital asset companies.
(Reporting by Saqib Iqbal Ahmed and Samuel Indyk; Additional reporting by Tom Westbrook; Editing by Clarence Fernandez, Christian Schmollinger, Diti Pujara, Rod Nickel)
