NEWS / Foreign Exchange

The dollar strengthened a bit yesterday versus most major currencies in quiet trading

The dollar strengthened a bit yesterday versus most major currencies in quiet trading. However, there really does not appear to be an obvious catalyst to explain the dollar's rise. Perhaps some market participants are simply adjusting positions ahead of today's FOMC meeting. Although there is very little chance that the Fed will change rates today, investors will scrutinize the FOMC's statement for clues about the future course of monetary policy. The Fed has been saying that its "predominant policy concern remains the risk that inflation will fail to moderate as expected." A decision to remove that clause from the statement would stoke expectations of future monetary easing, which likely would lead to renewed dollar selling.

That said, we do not look for the FOMC to make significant changes to its statement today. If it does not make major changes, then greenback could strengthen a bit later this afternoon. Indeed, the dollar has declined rather sharply over the past few months, and some retracement is bound to occur sooner or later. However, as we wrote in our latest "Monthly Economic Outlook", which lays out our currency forecasts, we believe the dollar will continue to trend lower for the foreseeable future. (The May outlook will be posted to www.wachovia.com/economics later today or tomorrow.)