The Fed will seek to reassure markets that the underlying economy is sound which would provide some dollar relief,… … but strong dollar gains are unlikely.

Caution will persist ahead of the
Tuesday Federal Reserve interest rate decision. There is unlikely to be a change
in rates, but the statement will be watched very closely and this meeting is
certainly the most important of the year so far.

The dollar will tend to some under
renewed selling pressure if the Fed expresses increased concerns over the growth
outlook and credit-related difficulties. The impact should be limited to some
extent by the fact that markets have already priced in at least one interest
rate cut this year. Any evidence of complacency over the credit situation by
Chairman Bernanke would also tend to undermine Federal Reserve credibility.

The Fed will, therefore, need to
balance the growth and inflation concerns at the same time as offering
reassurance over the underlying economy's health. A favourable Wall Street
reaction to the Fed statement would help support the dollar in the near
term.

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