Dollar dips before Fed announcement, Aussie gains after rate hike



* Graphic: World FX rates Link

By Karen Brettell

NEW YORK, May 3 (Reuters) - The U.S. dollar fell against a basket of currencies on Tuesday, as investors evaluated how much of the Federal Reserve's expected move to hike rates this week and beyond was already priced in.

The dollar index hit a 20-year high last week on expectations the U.S. central bank will be more aggressive than peers in tightening policy, with inflation running at its fastest pace in 40 years.

But investors are also questioning whether most of the Fed's hawkishness is already factored in and the dollar's bull run may be due for a pause.

"I think that so much good news for the U.S. is priced in that there could be a buy the rumor sell the fact," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

The Fed is expected to raise interest rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it concludes its two-day meeting on Wednesday.

Fed funds futures traders expect the Fed’s benchmark rate to rise to 2.81% by year-end, from 0.33% now. FEDWATCH

Comments by Fed Chairman Jerome Powell at the conclusion of the meeting will be scrutinized for any new indications about whether the central bank will continue to hike rates to battle rising price pressures even if the economy weakens.

The dollar index =USD was last at 103.17, down 0.37% on the day, after reaching 103.93 on Thursday, the highest since Dec. 2002.

The Aussie dollar was the best performer on the day after the Reserve Bank of Australia raised its cash rate by a surprisingly large 25 basis points to 0.35%, the first hike in over a decade, and flagged more to come as it pulls down the curtain on massive pandemic stimulus.

The Aussie AUD=D3 was last up 0.79% at $0.7108.

The euro EUR=EBS rose to $1.0556, up 0.47%, after dropping to $1.0470 on Thursday, the lowest since Jan. 2017.

Concerns about inflation, growth and energy insecurity as a result of sanctions imposed on Russia after its invasion of Ukraine have sent the euro 14% lower against the dollar in the past three months.

Italian Prime Minister Mario Draghi on Tuesday called on the European Union to act on surging energy costs, saying "structural solutions" were needed.

"The European Union’s energy security issues remain precarious suggesting that the euro is certainly not out of the woods yet," said Jane Foley, head of FX strategy, at Rabobank in London.

The U.S. dollar has also benefited from safe-haven flows as COVID-19 restrictions in China trigger concerns about global growth and new supply chain disruptions.

Some of Shanghai's 25 million people managed to get out on Tuesday for short walks and shopping after enduring more than a month under a COVID-19 lockdown, while China's capital, Beijing, focused on mass tests and said it would keep schools closed.

The Japanese yen held just above 20-year lows against the dollar reached on Thursday, when the Bank of Japan strengthened its commitment to keep interest rates ultra-low by vowing to buy unlimited amounts of bonds daily to defend its yield target.

The Japanese currency JPY=EBS was last at 129.87, after reaching 131.24 on Thursday, the weakest since April 2002.

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Currency bid prices at 9:39AM (1339 GMT) Description

RIC

Last

U.S. Close Pct Change

YTD Pct

High Bid

Low Bid

Previous

Change

Session

Dollar index

=USD

103.1700

103.5700

-0.37%

7.847%

+103.6800 +103.0200 Euro/Dollar

EUR=EBS

$1.0556

$1.0509

+0.47%

-7.13%

+$1.0578

+$1.0493 Dollar/Yen

JPY=EBS

129.8700

130.1700

-0.22%

+12.82%

+130.2850 +129.7000 Euro/Yen

EURJPY=

137.12

136.78

+0.25%

+5.22%

+137.3700 +136.5500 Dollar/Swiss

CHF=EBS

0.9747

0.9776

-0.29%

+6.86%

+0.9794

+0.9722 Sterling/Dollar GBP=D3

$1.2540

$1.2495

+0.36%

-7.27%

+$1.2567

+$1.2493 Dollar/Canadian CAD=D3

1.2853

1.2879

-0.21%

+1.65%

+1.2893

+1.2840 Aussie/Dollar

AUD=D3

$0.7108

$0.7052

+0.79%

-2.21%

+$0.7147

+$0.7048 Euro/Swiss

EURCHF=

1.0287

1.0269

+0.18%

-0.79%

+1.0295

+1.0256 Euro/Sterling

EURGBP=

0.8417

0.8405

+0.14%

+0.20%

+0.8420

+0.8373 NZ

NZD=D3

$0.6444

$0.6430

+0.30%

-5.78%

+$0.6475

+$0.6413 Dollar/Dollar

Dollar/Norway

NOK=D3

9.3915

9.4445

-0.50%

+6.67%

+9.4645

+9.3840 Euro/Norway

EURNOK=

9.9175

9.9238

-0.06%

-0.95%

+9.9435

+9.8827 Dollar/Sweden

SEK=

9.8469

9.9125

-0.11%

+9.19%

+9.9194

+9.8304 Euro/Sweden

EURSEK=

10.3953

10.4072

-0.11%

+1.58%

+10.4195

+10.3702
Additional reporting by Joice Alves in London; Editing by Edmund Blair

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