Dollar steady before Fed minutes as yen dithers near 145-mark

LONDON, July 5 (Reuters) – The U.S. dollar was treading water against other major currencies on Wednesday as traders waited for the release of minutes from the Federal Reserve’s last meeting that could offer clues to the outlook for interest rates.

Australia’s dollar fell in line with the Chinese yuan after data showed China’s services activity expanded at the slowest pace in five months in June, the latest sign of a sputtering post-pandemic recovery in the world’s second-largest economy.

The dollar index – which measures the currency against a basket of six other major currencies including the euro and Japan’s yen – was flat on the day at 103.04, having held in a range of roughly 102.75-103.75 since early June.

The Federal Open Market Committee is due to release the minutes from its most recent policy meeting later on Wednesday.

Markets are pricing in an 86% chance that the Fed will raise rates by another quarter-point in July and a near-20% chance of another 25-basis point increase in September.

Investors will scour the minutes for any indications of the Fed’s thinking, but Friday’s monthly employment report will almost certainly carry more weight, analysts said.

“It is the incoming numbers that dominate rather than Fed-speak,” RBC currency strategist Adam Cole said.

The euro rose 0.1% to $1.0891, while sterling was steady at $1.2715.

The dollar hovered around 144.62 yen, below the 145 level that prompted intervention by Japanese authorities last autumn. The greenback had last week briefly popped as high as 145.07 for the first time since November.

The dollar-yen rate has broadly moved in synch with the U.S. 10-year Treasury yield , which was roughly unchanged on the day at 3.851% after resuming trade following Tuesday’s Independence Day holiday.

“The market is paying attention to the potential risk of intervention, but as a medium-term trend, the market is looking for further downside for the yen,” said Shusuke Yamada, chief forex and rates strategist at Bank of America in Tokyo.

“We don’t see a very high probability that the Ministry of Finance will intervene at the same level as last year – and if the move is not rapid, below 150 we might not see intervention at all.”

RBC’s Cole said his team’s model had placed a 25% chance on there being intervention in the yen, though much would hinge on the pace of the currency’s changes, rather than the level alone.

“So 145 may not be as important as it is perceived to be. If USD/JPY stabilises for a while, intervention risk will diminish quite quickly,” he said.

The Australian dollar fell 0.3% to $0.6674, putting it on course to snap a four-day streak of gains.

Prior to the Chinese services data, the Aussie had been slightly firmer following another stronger yuan fixing from the People’s Bank of China, fueling bets for imminent policy support from Beijing.

“In the short term, it’s not great news for the AUD,” Tony Sycamore, a markets analyst at IG in Sydney, wrote in a client note.

“However more broadly, it will provide support … on expectations of an imminent policy response from Chinese authorities,” Sycamore added.

The yuan headed for its first down day in four sessions in the offshore market, slipping 0.3% to 7.2521 per dollar .

Reporting by Kevin Buckland
Editing by Shri Navaratnam and Helen Popper

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