Dollar drops to two week-low vs euro ahead of Fed outcome

BY GERTRUDE CHAVEZ-DREYFUSS

NEW YORK Tue Sep 16, 2014 3:49pm EDT

…"If Scotland becomes separate from the UK, it will most likely become a member of the EU. When it does, it will realise it cannot be 'independent, ever, because many aspects of life (political and economic) will be dictated by Brussels," said SLJ's Jen…

(Reuters) - The dollar fell to nearly two-week lows against the euro and Swiss franc on Tuesday, pressured by a report that said the Federal Reserve was unlikely to change its dovish stance on near-zero interest rates at a two-day policy meeting that ends on Wednesday.

That was in contrast to what some in the market were expecting, as they braced for a Fed that could suddenly turn upbeat about the U.S. economy and flag an interest-rate increase sooner rather than later.

On Tuesday, multiple traders cited the Wall Street Journal video for the dollar's sell-off. The video said the Fed's statement is likely to keep the phrase "considerable time" regarding the time frame as to when the U.S. central bank will start raising interest rates.

Investors sold the dollar across the board after investors saw the WSJ video, although some market participants believe the Fed could go either way.

"It is very difficult to predict exactly when the Fed might tactically do what," said Stephen Jen, a partner at hedge fund SLJ Macro Partners in London.

"Whether the Fed alters its language today, on October 28-29, or on November 16-17 matters less than my expectation that they will pivot before year-end. The best strategy is to hold a dollar-long portfolio and add if there is a dovish surprise."

The dollar index, a measure of the greenback's value against six major currencies, was on track for its first weekly loss in 10 weeks. Since May, the index has gained nearly six percent, but on Tuesday, it dipped 0.2 percent at 84.071 .DXY.

"We're prepared for a sustainable bull market in the dollar, probably starting later in Q4," said Mark McCormick, currency strategist, at Credit Agricole in new York. "The goal here is to buy the dollar in dips."

In late trading, the euro rose 0.2 percent to $1.2959, after hitting a peak of $1.2994, the highest since Sept 4. Still the euro has remained confined in a $1.2859-$1.2980 range since the fading of a selloff sparked by a European Central Bank interest rate cut early this month.

Against the Swiss franc, the dollar fell 0.3 percent to 0.9325 franc. Earlier, it dropped to 0.9302, the dollar's lowest level since Sept. 5. The dollar was down 0.1 percent against the yen at 107.11 yen.

Sterling, meanwhile, gained ahead of Thursday's referendum on Scottish independence, but that was mainly due to the fact that the dollar was sold off broadly.

The pound was last up 0.3 percent at $1.6281.

"If Scotland becomes separate from the UK, it will most likely become a member of the EU. When it does, it will realise it cannot be 'independent, ever, because many aspects of life (political and economic) will be dictated by Brussels," said SLJ's Jen.

(Additional reporting by Patrick Graham in London; Editing by Bernadette Baum and Chizu Nomiyama)