Fed set to leave rates alone amid signs of rising inflation

The dollar gained slightly against the euro, trading at $1.1993.

While the Federal Reserve is widely expected to keep the benchmark interest rate on hold at its policy meeting ending on Wednesday, it looks certain to raise borrowing costs next month, given signs of possible acceleration in the US economy, and possibly two more times over the remainder of the year.

The dollar, traded against a basket of major currencies, rose 0.4 percent to 92.221, the highest since January 11 and higher than where it started the year.

Fed Chairman Jerome Powell has maintained that the central bank will pursue a middle-of-the-road approach to monetary policy, continuing to gradually lift rates in the face of a robust economy that had yet to spark a jump in inflation.

A hawkish-sounding Fed could further boost the dollar, which has roared higher in recent weeks, erasing its year-to-date losses against a basket of currencies. "On the whole the dollar will continue to take its cue from the fixed income markets".

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The benchmark US 10-year Treasury yield eased about 1 basis point in early Asian trade to 2.970 percent.

BNY Mellon strategists said that if the Fed drops any cautionary comments on its inflationary outlook, then it would signal a growing confidence among policymakers that inflation has firmed up enough for an increase in forecasts. The gains came amid signs the Fed will be the only major central bank to raise rates in the coming months.

Most analysts have been negative on the USA currency this year, predicting that a splurge in government borrowing and a US administration keen on a weaker currency would dent the dollar just as investors flocked back to the euro zone. In the longer-term, gold remains in a bearish trend the dollar is likely to continue strengthening.

The stronger dollar was felt widely across commodity markets and the emerging economies that are now borrowing record amounts of debt in the USA currency, data from the Bank for International Settlements revealed this week.

USA stocks fell in late morning trading as the latest batch of earnings from companies such as Pfizer and Tapestry, formerly Coach, disappointed investors, and as energy shares fell. -China trade spat, have provided further dollar support.

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"The key USA dollar driver has been the divergence between economic data in the US and the rest of the world, and USA data continues to look comparatively robust" Morgan Stanley said. The Fed is likely to announce at 2 p.m. EDT (1800 GMT) that it is holding interest rates steady, but it could encourage expectations of a rate increase in June.

The Fed held its key interest rate steady Wednesday but noted that inflation has climbed close to its 2% goal, paving the way for another rate hike in June.

With the dollar rallying, there were several casualties on Tuesday.

The dollar index fell 0.1 per cent to 92.379.

The crown is one of the worst performing major currencies in 2018 as investors bet the Riksbank will be one of the last central banks to rein in its stimulus.

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Sterling also skidded more than half a percent to below $1.37, although most of the move was down to more weaker-than-expected British economic news.

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