Dollar in holding pattern ahead of Fed statement

LOS ANGELES (MarketWatch) — The forex market came to a virtual standstill early Wednesday, with the major currency pairs moving sideways ahead of the release of the Federal Reserve's latest policy statement, due later in the day.

After seeing a modest increase in Tuesday trading, the ICE dollar index (DXY)  , which tracks the greenback against a basket of six rivals, turned flat, quoted at 79.645, compared to 79.644 late Tuesday in North America.

The WSJ Dollar Index (XX:BUXX)  , an alternate measure of the U.S. unit, was unchanged at 72.24.

Economists widely expect the Fed to delay its "taper" — the slowing of its current pace of stimulative asset purchases — due to a recent slowdown in the U.S. recovery, with the market's main focus now on clues as to when the taper will in fact begin.

AFP/Getty Images

"The only way that the Fed could catch the market by surprise is if they brush off the recent data deterioration and appear less dovish. The chance of this happening is very slim but not out of the question because the recovery is widely expected to regain momentum in November after slowing in October," wrote BK Asset Management managing director Kathy Lien.

With the Fed expected to keep its easing at current levels and the outlook for the U.S. economy uncertain, Crédit Agricole said the dollar was unlikely to see a sharp rally in the near future. However, they said more limited gains were possible, as "the dollar index appears to have settled at a relatively low level."

They specifically pointed to scope for gains against the euro, which they said could suffer from upcoming European bank stress tests.

Click to Play Japan's Abe on economic, foreign policy

Japanese Prime Minister Abe discusses Abenomics and where Japan's relationship with both the U.S. and China is headed.

Likewise, "the relative outlook for monetary policy is likely to move in the dollar's favor. That is, we suspect there is more room for the [European Central Bank] to surprise on the dovish side as the market gets more comfortable with a 2014 taper from the Fed," Crédit Agricole said.

They also cited "likely upside risk to U.S. growth surprises, given the recent deterioration in U.S. forecasts."

As the lack of movement in dollar index suggested, the top currency pairs sat little changed from their late-Tuesday levels.

The euro (EURUSD)  bought $1.3738, negligibly down from $1.3743, while the British pound (GBPUSD)  was quoted at $1.6038, compared to $1.6035.

The Japanese yen (USDJPY)  also stood still, with the dollar at ¥98.17, versus ¥98.19 late Tuesday, while the Australian dollar (AUDUSD)  was unchanged at 94.77 U.S. cents.