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CORRECTED-FOREX-Dollar steady in cautious trade as Fed looms
January 26, 2016 / 12:44 AM / 2 years ago

CORRECTED-FOREX-Dollar steady in cautious trade as Fed looms

(Corrects euro-dollar level in paragraph 8)

* Investors focus on Fed's reaction to recent market turmoil

* Euro undermined by ECB easing exceptions

* Aussie slips as crude futures resume slide on oversupply fears

By Lisa Twaronite

TOKYO, Jan 26 (Reuters) - The dollar held close to recent trading ranges early in Asia on Tuesday, with investors cautiously awaiting the outcome of the Federal Reserve's two-day policy meeting amid the backdrop of stressed financial markets and slackening global growth.

U.S. interest rates futures implied traders placed a mere 13 percent chance the Fed will hike rates this week. Investors will be parsing the message on what, if any, effect volatility in global markets, plummeting oil prices and heightened fears of a Chinese slowdown will have on the Fed's intentions to continue raising interest rates this year.

The dollar edged down slightly against the yen at 118.11 , but remained comfortably above a one-year low of 115.97 plumbed last week, with investors also focusing on the Bank of Japan's two-day meeting that will end on Friday.

Sources familiar with the Japanese central bank's thinking say it is likely to cut its core consumer inflation forecast for the coming fiscal year to possibly below 1 percent.

Most strategists and market participants expect the BOJ to hold pat despite the increasingly worrying economic data and stressed markets, though speculation that policymakers might muster additional stimulus steps have underpinned the greenback.

"The market was caught long JPY amid the rapid build-up in expectation for easing. There should be further scope for a reversal to weigh on JPY ahead of the event," wrote Todd Elmer, Citi's Asian head of G10 FX strategy.

"Citi attaches up to a 40 percent probability for a move from the BOJ," he added.

The euro was steady at $1.0851, above last week's two-week low of $1.0776 but still undermined by growing expectations that the European Central Bank is gearing up to take more easing steps of its own.

ECB President Mario Draghi promised on Monday to increase inflation, rejecting criticism of the central bank's loose monetary policy and arguing that sluggish growth in prices was damaging the euro zone economy.

Markets now price in a 10-basis-point cut in the ECB's -0.3 percent deposit rate in March, and many investors also expect the central bank to increase its monthly asset purchases.

The Ifo German business confidence deteriorated to an 11-month low in January, with manufacturers particularly concerned that Europe's largest economy will suffer from a slowdown in emerging markets.

The Australian dollar, meanwhile, slipped about 0.2 percent to $0.6936, after crude oil futures shed 6 percent on Iraq's announcement of record-high oil production against a backdrop of an oversupplied global oil market. (Editing by Shri Navaratnam)

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