Dollar firm as market looks to Fed for rate hike outlook

The Canadian dollar and the Mexican peso gained after media reports that the U.S. administration had dropped a contentious demand related to auto-content, removing a key roadblock to a deal for a new North American free-trade (NAFTA) agreement.

The dollar index was steady at 90.28, after having risen to 90.446 on Tuesday, an almost three-week high.

The index has, however, broadly been in a holding pattern between 90.934 and 89.399 this month, waiting for clarity on whether the policy-setting Federal Open Market Committee (FOMC) will forecast four rate hikes this year, instead of the median three hikes seen in December's quarterly forecast.

Followed by the FOMC announcement at 1800 GMT, Jerome Powell will hold his first news conference as Fed chief at 18:30 GMT.

"Markets have taken a very hawkish turn with respect to the FOMC in recent days. One big tell is that 2-year yields and expected rates in Fed funds futures markets went up yesterday despite the absence of economic data and a seriously downbeat equity market," wrote Steven Englander, head of research at Rafiki Capital Management.

The two-year yield jumped to 9-1/2-year high of 2.349 percent on Tuesday.

As the U.S. currency firmed, the euro traded at $1.2261, having fallen 0.78 percent on Tuesday and hitting a near three-week low of $1.2240.

Against the yen, the dollar stood at 106.46 yen, after Tuesday's gains of 0.41 percent, though trading was slow due to a public holiday in Tokyo.

The British pound was off Monday's one-month peak after UK inflation slowed more than forecast in February, the first of several sets of data in a week when the Bank of England is expected to signal interest rates will rise as early as May.

The pound was at $1.4000, versus Monday's high of $1.4088.

The Hong Kong dollar hit a 33-year low of 7.8452 per dollar on Wednesday, inching closer to the lower end of the monetary authority's targeted trading band, as the interest rate gap between the U.S. and Hong Kong benchmarks widened further.

FOCUS ON U.S. TARIFFS, NAFTA

The Australian dollar hit a three-month low of $0.7679 on Tuesday and last stood at $0.7686, having fallen 2.4 percent in the past week.

"The last three days has seen the AUD come under pressure as investors have considered Australia's exposure to Asian markets in general and China in particular," said Simon Derrick, chief currency strategist at BNY Mellon in London.

As a producer of basic commodities used in the world supply chain, Australia would have much to lose should U.S. protectionism lead to a tit-for-tat reprisal from China, a key consumer of several commodities.

U.S. President Donald Trump is expected to unveil up to $60 billion in new tariffs on Chinese imports by Friday, targeting technology, telecommunications and intellectual property.

The Canadian dollar gained 0.35 percent to C$1.3025 to the U.S. dollar, while the Mexican peso gained 0.7 percent to 18.630 per U.S. dollar, following the report of softening in Washington's stance towards the NAFTA.

"Near-term outlook will definitely still be surrounding NAFTA and Trump's tariffs," said Mingze Wu, FX trader of global payments for INTL FCStone Ltd in Singapore.

"Currently there is still a lot of uncertainty on how Trump will negotiate new terms for NAFTA, but signs are looking good after he has come down significantly from his 'no NAFTA' rhetoric when he first took over as the 45th POTUS."