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Dollar Edges Higher Ahead of Federal Reserve Statement

The dollar edged higher in early European trading Wednesday, but remained below recent highs amid caution ahead of the U.S. Federal Reserve's latest policy decision.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 92.493, having earlier retreated from last week’s 3 1/2-month high of 93.194.

USD/JPY rose 0.1% to 109.87, GBP/USD was largely unchanged at 1.3876, EUR/USD edged lower to 1.1810, while the risk-sensitive AUD/USD was flat at 0.7360.

Elsewhere, USD/CNY edged 0.1% lower to 6.5036, with the yuan slightly rebounding after recording its worst day since October on Tuesday as a result of the turmoil in local equity markets.

The main focus Wednesday will be on the conclusion of the two-day meeting of the U.S. Federal Reserve. The central bank’s unexpected hawkish turn at its previous meeting in June led to a month-long rally for the dollar, but traders are not expecting any significant changes in today’s statement, even with discussions underway over the timing of the exit from its bond-buying program.

“From the threat of the highly contagious Delta virus variant, expiring eviction moratorium and extra unemployment benefits, there are just too many uncertainties for the Fed to press the pedal on taper,” said Kathy Lien, an analyst at BK Asset Management.

The U.S. Centers for Disease Control and Prevention recommended Tuesday that fully vaccinated people begin wearing masks indoors again in areas where cases are surging, a reflection of the growing risks.

However, if “one of two five-letter words (Delta or Taper) make their way into the FOMC statement, we will see a big reaction in the U.S. dollar,” added Lien. “If the Fed includes concerns about the Delta variant, the U.S. dollar could extend its slide quickly. If it shrugs off those worries and officially acknowledge that taper is coming, the U.S. dollar will soar.”

The euro wasn't helped by consumer confidence releases in Germany and France that showed confidence failing to improve, while Sterling was supported by reports that the U.K. government will allow fully-vaccinated travelers from the U.S. and EU to enter England without quarantining, possibly as early as next week. In emerging Europe, meanwhile the Hungarian forint continued to push higher after Tuesday's surprisingly large key rate increase by the central bank. The 30 basis point hike to 1.20% was Hungary's second in as many months.

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