LONDON - The U.S. dollar held below its 2-1/2 week high on Wednesday as risk sentiment stabilised before a Federal Reserve meeting where policymakers are widely expected to signal readiness to start raising interest rates from March.
Markets have been on a rollercoaster ride this week as the combination of a hawkish Fed and slowing growth have unnerved investors, prompting them to dump high-flying technology shares and seek refuge in safe-haven assets such as the dollar.
It briefly touched a Jan. 7 high of 96.30 against a basket of currencies on Tuesday before ending below that level.
In early London trading, it was a shade higher at 96.08 with U.S. stock futures up more than 1%, indicating a stronger start on Wall Street.
Citibank strategist Ebrahim Rahbari said broader risk conditions, investors' appetite for riskier assets, such as stocks and emerging markets currencies, were playing a more important role for the dollar than the expected Fed rate hike trajectory.
But if the Fed turned even more hawkish than what markets have priced in already then that could pressure the dollar.
Traders waited both for more clues on the timing and pace of U.S. interest rate hikes and how the central bank will go about slimming down its almost $9 trillion balance sheet, a process dubbed quantitative tightening (QT)
"Market sentiment remains fragile," TD Securities strategists said, noting that "any hints 'around the starting point for QT or 'sooner' and 'faster' on hikes could be market-moving."
Money markets now price in a first rate rise in March, followed by three more quarter-point increases by year-end.
The euro slipped 0.1% to $1.1286 after hitting $1.12640 overnight for the first time since Dec. 21.
Western leaders stepped up preparations for any Russian military action in Ukraine while Moscow voiced its concern after 8,500 U.S. troops were put on alert to deploy to Europe in the event of an escalation.
Against the Swiss franc, the euro stabilised at 1.0385 francs per euro, not far from a mid-2015 low of 1.03 hit on Monday.
(Reporting by Saikat Chatterjee; Additional reporting by Kevin Buckland in TOKYO; Editing by Tomasz Janowski) ((email@example.com; +44-20-7542-1713; Reuters Messaging: firstname.lastname@example.org))