Dollar near two-week high ahead of Fed meet, dovish European Central Bank

The dollar held near a two-week high early on Wednesday ahead of the Federal Reserve`s closely-watched policy decision later in the day, supported by a surprisingly dovish European Central Bank (ECB) and bearish eurozone economic data. 

The dollar index versus a basket of six major currencies was steady at 97.615 after climbing to 97.766 on Tuesday, its highest level since June 3.

Focus was on whether the greenback can retain its strength after the Fed`s two-day policy meeting ends later on Wednesday.

The Fed is widely expected to stand pat on monetary policy this time but open the door for an interest rate cut at the next meeting in July.

"The market has mostly priced in a July rate cut and unless there is a big dovish surprise at the FOMC (Federal Open Market Committee) meeting it is hard to imagine the dollar coming under downward pressure," said Takuya Kanda, general manager at Gaitame.Com Research Institute.

"But there will be a lot to digest at this FOMC, such as the Fed`s views on the economy and prices and Chair (Jerome) Powell`s comments. It is hard to tell which of these factors the market decides to latch on and react to."

The prospect of the U.S. central bank lowering rates has also driven benchmark Treasury yields to near two-year lows while boosting equity prices.
The euro was steady at $1.1198 after shedding 0.2% overnight, when it brushed a 15-day trough of $1.1181.

The common currency dropped along with a decline in German government bond yields, which hit a new record low on Tuesday, after ECB chief Mario Draghi said the bank will need to ease policy again if inflation doesn`t head back to its target.

A closely watched survey by the ZEW Institute showing that the mood among German investors had deteriorated sharply in June also weighed on the euro.
 
The Australian dollar was a shade higher at $0.6884 after mounting a rebound the previous day, when it pulled away from a 5-1/2-month low of $0.6832 set on growing expectations that the Reserve Bank of Australia may have to cut rates again.

The Aussie, along with the Chinese yuan, got a lift on Tuesday as China and the United States rekindled trade talks ahead of a meeting next week between Presidents Donald Trump and Xi Jinping.

The Chinese yuan extended overnight gains in offshore trade to reach 6.8953 per dollar, its strongest since May 14.

The dollar gained 0.1% to 108.555 yen after losing modest ground overnight.