The dollar climbed on Tuesday ahead of an expected interest rate rise by the US Federal Reserve, as political risks from Dutch and French elections to Britain’s exit from the EU weighed on European currencies. The dollar index, which measures the greenback against a basket of six major peers – four of them European – climbed by a third of a percent to 101.67.
The euro, which on Monday hit a five-week high above $1.07 on the expectation that the European Central Bank is moving towards winding back its stimulus programme, inched down to $1.0644, with dovish comments from ECB officials adding to a cautious mood.
Sterling slipped as much as 0.9 percent to $1.2110, its lowest in eight weeks, as concerns increased over a second Scottish independence referendum and the triggering of Article 50, which will formally begin Brexit negotiations.
The Netherlands will vote on Wednesday in an election that is seen as a test of anti-immigrant, populist politics that swept across the West in 2016.
Polls suggest the government may lose about half its seats at the hands of the anti-Islam Party for Freedom (PVV) party of Geert Wilders. Though Wilders has virtually no chance of winning enough seats to form a government, a PVV win would nevertheless send shock waves across Europe.
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“The worry is that PVV will do better in Holland on Wednesday than what’s already priced in (and) you’ve got these tensions in the UK because of the Article 50 trigger,” said BMO currency strategist Stephen Gallo, in London.
“So you’ve got a stronger dollar weighing on European currencies because the political outlook for Europe is so uncertain right now, and Fed messaging has not helped those currencies, with speculation that the March hike could be a hawkish hike,” he added.
With a Fed rate increase already seen as a done deal, investor focus was on what kind of a message the Fed would deliver after its two-day meeting starting later on Tuesday. “It is a wait-and-see mood that is mostly prevailing in the market ahead of the Fed’s decision,” said Shin Kadota, senior currency strategist at Barclays in Tokyo.
“Expectations for a hawkish dot plot was a factor that has pushed up the dollar recently, with hopes for the number of times the Fed could hike rates this year having increased to four from three.”
The “dot plot” is policymakers’ rate projections and provides a view into their interest rate outlook.
Masashi Murata, senior strategist at Brown Brothers Harriman in Tokyo, said expectations for four U.S. rate increases this year look excessive, and that the Fed meeting could help cool exaggerated policy tightening expectations.
Investors also have their eyes on the Trump administration’s fiscal 2018 federal budget plan, which will be released on Thursday, and on a meeting of G20 finance ministers and central bankers in Germany on Friday.