Dollar lifted by caution ahead of Fed, G20

September 23, 2009 09:38:37 AM

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The dollar found strength Monday as investors turned cautious about potential surprises at this week's US Federal Reserve policy meeting and the Group of 20 summit.

The euro drifted down to 1.4676 dollars at 2100 GMT against 1.4740 late Friday in New York.

The greenback climbed to 91.99 yen from 91.35 on Friday.

Traders were awaiting a two-day meeting of the Federal Reserve's policymaking Federal Open Market Committee beginning on Tuesday followed by a summit of Group of 20 (G20) developed and developing nations later in the week.

"No major news is good news for the dollar. A holiday in Japan and the lack of eurozone economic data helped to further the dollar's recovery," said Kathy Lien, director of currency research at Global Forex Trading.

Lien said the Federal Open Market Committee meeting would be watched for any shift in the central bank's economic outlook -- which could suggest a boost from its near-zero interest rates sooner than anticipated.

"If they become more optimistic, it would initially help to drive the dollar higher but given the schizophrenic nature of the currency market, a rise in risk appetite may erase the dollar's gains," she said.

Andy Douglass at PNC Bank said many believe that this Fed will indicate it is scaling back some of its big asset purchases designed to ease credit.

"A dropoff in asset purchasing should be dollar-positive as a tightening in monetary policy like this should increase the overall appeal of dollar investments," he said.

Lien said she did not expect much from the G20 to support the US currency.

"Whenever the dollar becomes very weak, central banks and foreign investors start to become very concerned about retaining the notional value of their investments," she said.

"In a more stable global economic environment, the dollar's reserve status would be a greater issue at the G20 meeting, but right now, G20 leaders still have bigger fish to fry including the possibility of friction around the issue of protectionism."

The G20 leaders will consider unwinding the unprecedented support to help recovery but are expected to be cautious on any move for fear of jeopardizing a return to growth.

At Bank of Tokyo Mitsubishi, economist Derek Halpenny said recent auction results and prospects for stable long-term US inflation suggested that demand for US Treasury bonds would be healthy this week, when bond sales worth 112 billion dollars are expected. That expectation also boosted the dollar on Monday, he said.

In late New York trade, the dollar stood at 1.0321 Swiss francs after 1.0299 Friday.

The pound was at 1.6210 dollars from 1.6468.