Neil DennisThe dollar fell on Wednesday ahead of a widely forecast rise in US interest rates expected to be announced by the Federal Reserve later in the day.
The US currency was down against most of its rivals – the majors such as the euro and sterling, and emerging market currencies.
A country's currency is usually supported when its central bank is engaged in a series of interest rate increases: higher rates foster better returns for international investors and encourage greater investment flows.
Fed chair Janet Yellen: Any dovish tone at today's press conference is likely to weaken dollar further - Source: Wikimedia CommonsFed communication
The Fed, however, has been extremely diligent during the current cycle of rate hikes in communicating its intentions to the markets to ensure they are not surprised.
Meanwhile, a soft spot in US inflation has clouded the future path for US rates. A further rate rise in September had previously been expected, but markets have begun to doubt this.
"It should be kept in mind that the recent weakness in US inflation has not only sparked concerns for the health of the US economy but also created uncertainty around the Federal Reserve’s policy plan for 2017," said Lukman Otunuga, analyst at FXTM.
Press conference
Much will be learned from the Fed's subsequent press conference, and any dovish tone taken by Janet Yellen, chair, is likely further undermine the dollar bulls.
Otunuga continued: "The outlook remains tilted to the downside as political uncertainty in Washington and soft economic data weighs heavily on the currency.
"With a Dovish hike on the cards in today’s meeting, the Dollar Index could find itself under renewed selling pressure."
Dollar falls
Analysts agreed that the Fed's communication policy had been so effective that a quarter point rate rise to 1-1.25% on Wednesday was completely priced in by the market.
Indeed, the dollar was lower ahead of the Fed's 1800GMT decision.
The Greenback fell 0.1% against the euro to €1.1219 and lost 0.3% to A$0.7559 against the Australian dollar and fell 0.5% to NZ$0.7254 against the New Zealand dollar.
Emerging market currencies were also dominant against the dollar. The korean won rose 0.4% to KRW1,123.93 and the Indian rupee was 0.1% higher at INR64.28.
The dollar index, a measure of the Greenback's performance against a basket of its main rivals, was flat at 97.009.
The pound, however, reversed early gains after weaker than expected wage inflation data in the UK. Sterling fell 0.2% to $1.2740.
