Dollar stabilises near recent peaks as traders await Fed

© Reuters. FILE PHOTO: U.S. one dollar banknotes are seen in front of displayed stock graph in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration

By Tom Westbrook

SINGAPORE (Reuters) - The U.S. dollar hovered below recent peaks on Tuesday, as investors turned to this week's Federal Reserve meeting for clues on the policy outlook, while cryptocurrencies pulled back sharply from an attempt to break out of a monthslong range.

The dollar held at $1.1809 per euro in Asia, finding support after a small dip on Monday.

It bought 110.18 yen and the Australian and New Zealand dollars held onto small gains made Monday.

The greenback has been rising broadly for more than a month as markets have become wary of the Fed starting to taper its monetary support. Investors turned long dollars for the first time since March 2020 last week, positioning data shows.

The Fed meeting is on Wednesday and the focus is on discussions around bond purchases and insight into the bank's comfort with surging inflation, with the upshot for currency markets not clear cut.

Commonwealth Bank of Australia (OTC:CMWAY) strategist Joe Capurso said a hint that tapering could soon begin would lift the dollar.

Steve Englander, head of G10 FX research at Standard Chartered (OTC:SCBFF), however, said that a steer on the Fed's thinking about a sharp but likely transitory jump in inflation will be just as important.

"We expect that Fed Chair (Jerome) Powell will convey more patience than many recent Fed speakers about bringing inflation lower, as long as domestic economic conditions still point to labour market slack," said Englander in a note to clients.

"A dovish lean by Powell will likely push up longer-term interest rates ... because of a rally in inflation breakevens and a reduction in market fears about slower medium-term growth.

"Paradoxically, this is likely to be dollar-negative because global uncertainty on the policy response to higher inflation would be reduced," said Englander.

A tick higher in inflation expectations on Monday pushed U.S. 10-year real yields to a record low of -1.123%, which also contributed to overnight softness in the dollar.

The U.S. dollar index fell 0.3% on Monday and was last steady at 92.600.

Elsewhere, concern at the spread of the Delta coronavirus variant and jitters in China's stock market kept trade cautious during Asia hours. The risk-sensitive Australian dollar was steady at $0.7382 and the kiwi held around $0.7000.

Sterling was above its 20-day moving average and near a one-week high at $1.3827 as early data seemed to show an ebb in surging COVID-19 cases in Britain in spite of the removal of many social curbs last week.

The Chinese yuan has held up despite turmoil in equities and was steady at 6.4760.

Bitcoin dropped sharply to $37,000 from a Monday peak above $40,000 after Amazon.com (NASDAQ:AMZN) offered a qualified denial of a weekend news report that said it was preparing to accept cryptocurrencies.

"Speculation that has ensued around our specific plans for cryptocurrencies is not true," said a company spokesperson.

"We remain focused on exploring what this could look like for customers shopping on Amazon."