FOREX: Dollar pulls back as Fed meeting comes into focus

The U.S. dollar fell for the fourth day in a row on Tuesday, as traders remained on alert for potential coordinated currency intervention by authorities in the United States and Japan, ahead of Wednesday's Federal Reserve interest rate decision.

The dollar has been under intense pressure this month from a range of factors including Washington's desire for a weaker currency and uncertainty over U.S. President Donald Trump's policymaking.

Against a basket of currencies, the dollar fell 0.48% to 96.64, hovering near September's 3-1/2-year low, and down from an earlier high of 97.287, in volatile trading.

“Because everyone is so jittery about the geopolitical situation and they’re so jittery with regards to the yen, plus there’s a news vacuum, it’s a perfect storm that can spark a big move like this,” Pepperstone senior research strategist Michael Brown said.

Trump's seemingly erratic approach to policymaking could come into play again on Wednesday after the Fed's two-day meeting, said Nick Rees, head of macro research at Monex.

"The big risk, as we see it, is not in the rate decision. We're pretty confident that the Fed is going to hold rates unchanged. But Trump is not going to like that."

Trump could announce his candidate for Chair Jerome Powell's successor soon after the rate decision, especially if the president does not support the central bank's decision, Rees said.

"We think that's going to inject some significant dollar volatility," he said.

The Trump administration's criminal investigation of Powell and an evolving attempt to fire Fed Governor Lisa Cook will also be in focus during the Fed's two-day policy meeting which starts on Tuesday.

YEN INTERVENTION WATCH

Much of the recent focus in the foreign exchange market has also been on the yen, which has rallied as much as 3% over the past two sessions on talk of the U.S. and Japan conducting rate checks - often seen as a precursor to official intervention.

That has helped the yen steady around 153 to 154 per dollar, some distance away from Friday's low of 159.23. It was last trading at 153.35, with the dollar down around 0.5% against the yen.

Parisha Saimbi, EM Asia FX and local markets strategist at BNP Paribas, said possible U.S. involvement suggests that there may be "multiple parties" prepared to intervene, which is different from previous intervention episodes in recent years.

While there has been no confirmation of rate checks from officials in Japan or the U.S., a person familiar with the matter told Reuters that the New York Federal Reserve had checked dollar/yen rates with dealers on Friday.

Top Japanese authorities meanwhile said on Monday they have been in close coordination with the U.S. on foreign exchange.

The possibility of intervention has left investors hesitant to push the yen lower, even amid concern about Japan's fiscal health. Analysts also said there is a high bar for coordinated intervention.

Bank of Japan money market data indicated that a spike in the yen against the dollar on Friday was not likely due to Japanese intervention.

The euro EUR= was last 0.4% higher at $1.1923, trading around levels last seen in June 2021. Similarly, sterling GBP= added 0.45% to $1.3738, having notched a six-month high earlier in the session.

The Australian dollar AUD= rallied 0.45% to $0.695, its highest since February 2023.

-Sophie Kiderlin and Rae Wee/Reuters