Peter Nurse

Investing.com – The dollar stabilized in early European trading Tuesday ahead of the start of the latest Federal Reserve meeting, while the Australian dollar weakened sharply after the country’s central bank tightened monetary policy less than many had expected.

The Dollar Index, which measures the greenback’s performance against a basket six currencies, was trading at 93.843 ET (800 GMT) Monday after falling to 94.313 on Monday.

Other markets fell 0.7%, to 0.7470, after the unexpected surprise of the market in which it did not increase its key rate by 0.1%. It stressed that inflation was still too low for any future increases.

But, it did not change its policy on yield curve control. It said that it would no more try to restrict three-year yields of government bonds. Although it also ended its projection that rates would not rise before 2024, the RBA did so in a manner traders expected given domestic inflationary pressures.

The focus now shifts to the most recent policy-setting meeting. It will begin Tuesday and last for two days.

The U.S. central bank is widely expected to announce a tapering of stimulus, especially after a record quarterly increase in Friday’s illustrated the degree of current inflationary pressure. 

“This measure had been a preferred one for the Greenspan Fed in the 1990s and a surging figure will no doubt be unnerving some core members of the FOMC,” said analysts at ING, in a note. “We think this will add to the case for a confident tapering announcement from the Fed on Wednesday.” 

Bloomberg’s survey indicates that the Fed checks the current $120billion monthly buying rate by decreasing Treasury purchases by $10bn per month and increasing the purchase of mortgage-backed security by $5bn per month.

Survey respondents are divided on when central banks will raise interest rates. A small number of economists suggest that it would be in early 2023, rather than 2022.

The stock traded 0.3% higher at 113.65. This is a continuation of the consolidation below an almost four year peak of 114.69, reached Oct. 20, and edged higher at 1.1610.

The close of trading on Thursday saw the currency drop to 1.3667, just ahead of the close on Thursday. This was despite the possibility that the central bank would raise its interest rates for only the second time in many years. 

Inflation in Britain looks set to rise to 5%, more than double the BoE’s 2% target, but the country’s economic recovery from last year’s slump looks like it’s slowing as the government withdraws key support programs for households and businesses.