Dollar edges up, currency markets sluggish ahead of cbank meetings

© Reuters. FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic

LONDON (Reuters) - Currency markets lacked clear direction in early European trading on Tuesday, with the dollar edging slightly higher but most major pairs little changed as investors looked ahead to central bank meetings this week.

In equity markets there were signs of improved risk appetite due to strong earnings, with European stocks opening higher following a rally in the Asian session.

But the dollar index held steady, up less than 0.1% at 93.913 at 0739 GMT.

The greenback rose 0.3% against the Japanese yen, with the pair at 114.065, holding below the four-year high of 114.695 reached last week.

The Bank of Japan meets on Thursday. It is set to maintain its massive stimulus programme and slash this year's inflation forecast in a sign it has no intention to follow other central banks that are preparing exits from crisis-mode policies.

The Canadian dollar was steady ahead of a Bank of Canada meeting on Wednesday, at which it is expected to raise its inflation forecast and to largely end stimulus from its pandemic-era bond buying program, starting a tentative countdown to the first interest rate hike since October 2018.

The Australian dollar, seen as a liquid proxy for risk appetite, was steady at $0.7494. Last week, it rose above the key $0.75 level for the first time since July.

"If the rally on the commodity market continues, AUD is likely to remain supported for now," wrote Commerzbank (DE:CBKG) strategist You-Na Park-Heger in a client note.

The New Zealand dollar was down 0.2% at $0.7156.

The euro was a touch lower against the dollar, down 0.1% at $1.1598, hit by expectations that the European Central Bank will take a dovish stance when it meets on Thursday.

"We believe that there is a good chance that the ECB will push back against current market pricing for ECB rate hikes," wrote MUFG currency analyst Lee Hardman in a note to clients.

"The ECB's continued reluctance to raise rates should continue to weigh on the euro as other G10 central banks embark on hiking cycles."

Monday's German business climate index, which showed business morale deteriorated for the fourth month running in October, also weighed on the euro.

ING strategists noted that, so far in 2021, energy-exporting currencies whose central banks are preparing to tighten - such as the Canadian dollar or Norwegian crown - have outperformed.

"The worst performers in the G10 space are the JPY and the EUR, both net energy importers, suffering the negative income shock from higher energy prices and with some of the most dovish central banks in the world," they wrote in a note to clients.

"Low energy inventories for both gas and crude and no signs that supply frictions are going to be eased anytime soon suggests this story should continue to play out."

China's offshore yuan was steady versus the dollar, with the pair changing hands at 6.3823.

A call between China's Vice Premier Liu He and U.S. Treasury Secretary Janet Yellen was seen as positive for Sino-U.S. relations.

Bitcoin was down around 0.9% at $62,528.40 at 0805 GMT, having fallen below the all-time high of $67,016.50 it reached last week.