Dollar under pressure as central bank meetings loom

 

Expectations that the Federal Reserve will this week emphasise plans to keep US interest rates near zero left the dollar at a five-week low on Monday, while concerns about China's stuttering economy pressured commodity markets.

 

The Federal Reserve, the European Central Bank and the Bank of England meet this week. All are expected to repeat or refine their "forward guidance" that borrowing costs will remain extraordinarily low as long as growth is sub-par and inflation is not a threat.

 

The dollar which shed 1.2% last week for its third straight weekly loss, remained under pressure at 81.615 as European trading gathered momentum having earlier hit a one month low against the yen.

 

"The dollar faces a lot of key event risk in the week ahead with the release of the US Q2 GDP report and latest FOMC policy meeting on Wednesday followed by the release of the US employment report for July on Friday," said Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi.

 

Two more giant merger deals, this time in the media and pharmaceuticals sectors, added to a flurry of M&A activity in recent weeks to keep European stock markets buoyant.

 

The FTSEurofirst 300 index of top European shares was up 0.6% at 1,212 points by 0745 GMT, with London, Frankfurt and Paris 0.5-0.6% higher.

 

In contrast, commodities markets were mostly softer, with both oil and growth-attuned copper at or near three-week lows. For crude it was demand worries that weighed, while Chinese manufacturing data on Thursday hit copper.

 

Asian stocks also saw a poor start to the week as investors braced for another round of disappointing economic news out of China. Japan's Nikkei hit a four-week low as those jitters were compounded by a stronger yen.

 

"A sense of caution is looming in the market, especially because investors are worried about a slowdown in the Chinese economy. And when they see a risk in Asia, they tend to buy the yen, and the Japanese market is hit by that," said Kyoya Okazawa, head of global equities at BNP Paribas.

 

In debt markets, German Bund futures edged up in thin trade and euro zone periphery bonds eased, but investors refrained from placing big bets before this week's monetary policy decisions and data.