The US dollar fell on Wednesday ahead of the Federal Reserve statement, where the Fed is expected to raise interest rates by an additional 25 basis points, and investors will be watching to see whether Fed Chairman Jerome Powell takes a hawkish tone on future monetary policy.
U.S. central bank appears to be nearing the end of its tightening cycle, and Fed officials have emphasized the need to hold interest rates at limited levels for a while in order to lower inflation. However, investors place the probability of a rate cut for the second half of this year.
"The market expressed high confidence that the terminal feed rate will be lower than the FOMC stated," said Adam Button, chief currency analyst at ForexLive in Toronto. "If the Fed is hawkish, the US dollar will strengthen, but the market is a little worried."
The Fed funds futures market set expectations for the Fed's benchmark rate at 4.91% for June and falling back to 4.47% by December while Fed officials had predicted the rate would rise above 5%.
The US dollar index was last down 0.32% at 101.78 and was above an eight-month low of 101.5 hit last Thursday.
ADP's National Employment Report on Wednesday showed that U.S. private payrolls. rose by 106,000 jobs last month, well below expectations in January, hinting at some cooling in the labor market.
The main focus of the US economy this week is the government's jobs report for January on Friday, which is expected to show that employers added 185,000 jobs in the month.
"Hiring is slowing and the job market isn't as hot as it was last year, but it's not clear whether it's calm enough to stop inflation," Button said.
Wages are expected to increase by 0.3% in the month, for an annual gain of 4.3%.
The euro, meanwhile, was largely unaffected by data showing inflation in the bloc had eased for the third straight month in January. The Euro was last up 0.38% against the dollar at $1.09025.
Investors said that eurozone inflation data was unlikely to affect the European Central Bank's (ECB) monetary decision on Thursday. The ECB and the Bank of England are each expected to raise interest rates by 50 basis points on Thursday.
Sterling strengthened 0.15% to $1.23360. The dollar fell 0.51% against the Japanese yen to 129.44.
