U.S. Dollar Firmer on Fed Expectations

The dollar held steady in cautious trade on Thursday, ahead of U.S. gross domestic product data that could reinforce or dent expectations that the Federal Reserve is on track to raise interest rates as early as September.  The U.S. central bank said after its regular policy meeting on Wednesday that the economy and job market continue to strengthen, leaving the door open for a possible interest rate increase at its next meeting.

The Fed’s statement underscored that the economy had overcome a first-quarter slowdown and was now “expanding modestly.”  The first estimate of second-quarter U.S. gross domestic product will be published later on Thursday. The economy is seen returning to growth, expanding by 2.7 percent, after a contraction in a weather-battered first quarter.

The GDP report “may boost the appeal of the greenback and spark a further decline in EUR/USD as signs of a stronger recovery fuels expectations for a 2015 Fed rate hike,” David Song, currency analyst at DailyFX, said in a note to clients.  “However, another weak GDP figure may undermine the optimistic outlook held by the Fed and fuel near-term headwinds for the greenback as it raises the risk for a further delay in the normalization cycle,” he said.