The FOMC statement will certainly be important for dollar sentiment. A slowdown in the rate of bond purchases and reassurance over growth trends would provide some dollar support, but the Fed is unlikely to take a very tough stance which will limit dollar backing. Markets will also still want to sell the US currency on rallies, but initial selling could reverse quickly, especially as unease over the global financial sector is liable to increase.
After failing to sustain gains on Monday, the US currency was firmly back on the defensive on Tuesday with selling on rallies a key market feature. The dollar dipped to a fresh 2009 low against the Euro and was also at fresh 12-month lows on a trade-weighted index as sentiment towards the currency remained weak.
There were reduced expectations that the Federal Reserve would move towards tightening interest rates in the near term and this eroded dollar support. The FOMC statement on Wednesday will certainly be very important for the US currency even though there is very little chance of a change in interest rates. The dollar will tend to gain some protection if there is a tougher than expected Fed statement and a suggestion that quantitative easing will not be extended.
A dovish stance would risk renewed selling pressure and, although the dollar could gain some respite, the FOMC appears unlikely to take a very aggressive tone which would limit the scope for sustained support.