Dollar eases as investors ponder outlook for Fed rates

The dollar held around five-week lows on Wednesday, before the conclusion of the Federal Reserve's policy meeting at which investors will be looking for any insight on what might happen with interest rates given the turmoil in the banking sector.

Markets show a quarter-point rise in US rates is the most likely outcome, but investors will be keen to hear what Chair Jerome Powell says about the crisis that has rattled global banks this month and how carefully the central bank feels it needs to tread.

Markets are pricing in about a 15% chance of the Fed not increasing rates, with a roughly 85% chance of a 25 basis point hike, according to the CME FedWatch tool. Just a month earlier, the market was pricing in a 24% chance of a 50 basis point hike.

"Today's rate hike is priced in and expected and there would be no reason to not do it," Fiona Cincotta, a strategist with City Index, said.

The Fed, together with other major central banks, has made provisions to grease the wheels of the financial system, after the failure of several smaller US lenders and the implosion of Credit Suisse (CSGN.S) at the weekend unleashed huge market volatility and a rout in banking stocks and bonds in particular.

Following Credit Suisse's shotgun takeover by UBS (UBSG.S), and US authorities and large banks helping prop up some of the more vulnerable regional institutions, investors are breathing a little more easily, leading to the dollar losing some of its safe-haven appeal this week.

The Fed meeting concludes on Wednesday with the 2 p.m. EDT (1800 GMT) release of a policy statement followed half an hour later by a news conference by Powell.

Christopher Wong, currency strategist at OCBC, said the focus will be on how the Fed communicates its forward guidance, in particular "the higher for longer" rhetoric.

"Ideally, we would like the Fed to go with a 25 basis point hike this meeting, tone down hawkish guidance and emphasize that policy decisions at subsequent meetings will continue to be data-dependent," Wong said. "This wish list should see dollar trade on the softer profile and risk proxies trade steadily".

The pound was the strongest performing G10 currency of the day, with a 0.6% gain versus the dollar after data showed UK inflation came in much hotter than expected in February, which puts Bank of England policymakers in a tough position when they meet on Thursday.

Markets show traders now fully expect a rise of 25 basis points, whereas just 24 hours ago, the chances of the bank raising by a quarter of a point or standing pat were 50/50.

"There had been a 50/50 feeling about would they hike or would they not and that print today has cemented the fact that they do need to hike tomorrow. But I don't think they will necessarily be talking about future hikes again," City Index's Cincotta said.

The euro was last down 0.4% against sterling at 87.81 pence, while gaining 0.2% against the dollar to trade at $1.079.

Meanwhile, the yen was flat around 132.41 per dollar, while the Australian dollar rose 0.4% to $0.6696, as did the kiwi, which rose to $0.622.

In cryptocurrencies, bitcoin was last up 0.44% at $28,276.58, but was below the nine-month peak it touched on Monday.