© Reuters. FILE PHOTO: Illustration photo of U.S. Dollar and Japan Yen notes
By Jemima Kelly
LONDON (Reuters) – The dollar steadied in a quiet market on Wednesday, with traders appearing to be in wait-and-see mode ahead of a slew of central bank meetings, most importantly the European Central Bank on Thursday.
The euro has climbed around 14 percent against the dollar since the start of the year. Last week hit its strongest levels since early 2015 as investors bet on a winding-back of the ECB's stimulus program and pushed back their expectations for further rate hikes from the U.S. Federal Reserve.
Amid this surge in the euro – which is likely to push down inflation – investors will be looking out for signs that ECB President Mario Draghi has become concerned about the exchange rate, and that the currency's strength could delay any policy tightening plans.
The euro was flat at $1.1924, over a cent away from last week's high of $1.2070.
"Right now everyone is basically waiting…for the ECB meeting tomorrow," said Commerzbank (DE:CBKG) currency strategist Esther Reichelt, in Frankfurt.
"A lot will depend on how Draghi addresses the euro. I'm quite confident that he'll address it in some way but the question is whether he'll address it strongly enough for the market to react."
Earlier, the dollar had weakened close to a 4-1/2-month low of 108.45 yen on worries over North Korea's nuclear ambitions and Hurricane Irma, one of the most powerful Atlantic storms in a century, which churned across northern Caribbean islands on Wednesday.
Despite the fact that the dollar had recovered to trade flat against the yen by 1144 GMT, Reichelt said this did not mean markets had regained their appetite for risk, pointing out that riskier currencies such as the Australian and New Zealand dollars were still firmly down on the day .
Resolving the North Korean nuclear crisis is impossible with sanctions and pressure alone, Russian President Vladimir Putin said on Wednesday after meeting his South Korean counterpart, adding that the impact of cutting oil would be worrying.
A top North Korean diplomat on Tuesday warned his country was ready to send "more gift packages" to the United States as world powers struggled for a response to the country's sixth and largest nuclear bomb test on Sunday.
"Markets have become increasingly sensitive to geopolitical influence," said FXTM analyst Lukman Otunuga, though others said reaction to the latest test had been relatively muted, given the severity of the threat.
Canada and Brazil's central banks will meet later on Wednesday, while Sweden's Riskbank will also meet on Thursday, ahead of the ECB.
The greenback was flat against a basket of other major currencies (DXY), pressured on Tuesday by Fed policymaker Lael Brainard saying inflation was "well short" of target and that the Fed should be cautious about raising U.S. interest rates.
Brainard's comments helped 10-year U.S. Treasuries close at their lowest level since November on Tuesday (US10YT=RR).