Dollar edges lower with Fed decision on deck

LOS ANGELES (MarketWatch) — The U.S. dollar was flat against most major rivals Wednesday, with investors preparing for a decision from the Federal Reserve about what it plans to do with its bond-buying program.

The Fed is slated to release a statement on monetary policy at 2 p.m. Eastern time . While many analysts expect there will be no change in the central bank's program of purchasing $85 billion a month in assets, investors will be looking for, at least, some insight about when a tapering of purchases will begin.

The ICE dollar index (DXY)  , which compares the U.S. unit with six rivals, inched down to 80.049 from 80.060 late Tuesday. The WSJ Dollar Index (XX:BUXX)  , however, edged up to 73.41 from 73.38.

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The Fed's purchases of U.S. government debt and mortgage-backed securities have been seen as hurting the greenback's value.

Speculators are holding "massive" amounts of long-dollar positions against the Japanese yen, the Australian dollar and the Canadian dollar (USDCAD) , according to the latest data from the Commodity Futures Trading Commission, cited by BK Asset Management managing director of foreign exchange strategy Kathy Lien in a note Tuesday.

"If the central bank fails to be as hawkish as the market expects, profit-taking on those positions could drive the dollar quickly and aggressively lower, even if the Fed ends up being one of the few central banks unwinding stimulus next year," she said.

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A recent round of better-than-expected economic data have raised the prospect that the Fed is getting closer to reducing the pace of its asset buys. Wednesday's policy announcement will mark the bank's last under Chairman Ben Bernanke, whose second term ends in January.

In May, he told Congress that "in the next few meetings," the bank could slow the pace of stimulus, though a widely anticipated move in September didn't materialize.

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Renewed strength of jobs growth in the past few months may be just enough to lead the Fed to begin tapering asset purchases, said Paul Ashworth, chief U.S. economist at Capital Economics, on Wednesday.

"It will be a close call, however," he said.

The central bank may make a "small" reduction of $10 billion, evenly split between Treasury securities and mortgage-backed securities, wrote Ashworth. "We also expect the Fed to take steps to strengthen its forward guidance on rates, in an attempt to offset the impact of tapering on long-term borrowing costs," he said.

While the Fed decision is likely to be highlight of Wednesday's session, reports on U.S. housing starts and building permits are also due.

In other currency action Wednesday, the euro (EURUSD)  rose to $1.3772 from $1.3765 during Asian trade ahead of a December business-sentiment survey from the Ifo institute in Germany. Sentiment in November rose on improved sales expectations.

Meanwhile, the British pound (GBPUSD)   rose to $1.6283 from $1.6265. Minutes from the Bank of England's policy meeting earlier this month are due out, as well as a government report on employment.

The dollar (USDJPY)  , however, gained ground against the yen, rising to ¥102.91 from ¥102.67 late Tuesday, while the Australian dollar (AUDUSD)  bought 89.06 U.S. cents, up from 88.95 U.S. cents.

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