The dollar hugged tight ranges against major currencies on Tuesday as investors waited to see how the Federal Reserve would prepare for a future rate hike when it meets later. Markets expect the Fed to leave rates at a 46-year low of one percent. But strong U.S. data, including an improvement in the jobs market seen in Monday's manufacturing survey, raised expectations the Fed might change the tone of its statement to prepare for a rate hike, currently expected in August. "The market is focused on the language of the Fed. They are warming up the market for a future rate hike, likely to come in August," said Fatih Yilmaz, currency strategist at Bank of America. By 0740 GMT the dollar was at $1.1946 compared with $1.1965 from late New York levels on Monday. Against the yen it was steady at 110.25 . Trading was thin as Japan was closed for the second day of a three-day holiday. The Fed is expected to issue a statement after the meeting at 1815 GMT.
END TO THE PATIENCE?
In March, the Fed reiterated it could afford to be "patient" about raising rates, implying the policymakers feel scant pressure to boost credit costs. Fed chairman Alan Greenspan said on April 21 interest rates would have to rise at some point, a theme that has become a mantra for Fed officials over the past months. But he also sounded calm on inflation, suggesting no imminent move. "Two things that could increase the market's hawkishness on Fed rate hikes today would be the Fed acknowledging the latest improvements in the labour market and removing the word 'patient' to describe how long it can wait to boost rates," said Thio Chin Loo, currency analyst at BNP Paribas in Singapore. "This could be brought forward to June if the Fed does turn more hawkish in its statement tonight. In the short-term, this could offer the U.S. dollar more support."
Much hangs on the next couple of payroll reports which could show whether hiring has picked up to a more robust pace. The April labour report is due on Friday. A rise of more than 170,000 jobs is expected in April payrolls, which, coming after March's 308,000 jump, would add to expectations for a U.S. rate rise. Analysts say other supportive news for the dollar was the brighter picture of the U.S. government's budget situation. The U.S. Treasury Department slashed its estimated borrowing for the current quarter in half on Monday and said it had borrowed far less than expected in the first three months of 2004. "Given the longer-term structural concerns for the dollar such information should be viewed as dollar positive," said Ashley Davies, currency strategist at UBS in Singapore.///