Dollar holds steady ahead of Fed rate decision

By Chibuike Oguh

NEW YORK, Oct 28 (Reuters) - The US dollar was flat against major currencies on Wednesday ahead of the Federal Reserve's interest rate decision, while the New Zealand dollar fell sharply after the country's central bank surprisingly left interest rates unchanged.

Traders expect the Fed to leave monetary policy unchanged but they see a 78% chance that the US central bank could lift interest rates by at least 25 basis points in December, according to the CME Group's FedWatch.

The euro was flat against the dollar at $1.1130, trading just above the May 2025 low it hit earlier this month.

Against the Japanese yen, the dollar was up 0.14% to 158.19 yen. 

"There's a general consensus that the Fed will not change policy," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "But with (Fed chair Kevin) Warsh's dislike for forward guidance, that means there's not going to be a strong pushback against market expectations, which are solidly for a December rate hike."

The dollar index, which measures the greenback's strength against a basket of six other currencies, was flat at 102.37.

The 2-year note yield, which typically moves in step with Fed interest rate expectations, rose 3.73 basis points to 4.774%.

Meanwhile, British finance minister John Healey told parliament on Wednesday he would raise taxes on banks, gambling and income for savers and landlords while also tightening value-added tax rules for online marketplaces - such as Amazon (AMZN.O) - to fund the package. 

The pound was flat against the dollar at $1.33 and was down about 0.13% versus the euro.

"The Chancellor of the Exchequer announced the budget but sterling hasn't really been affected by it, which is what I think the government probably wanted," Chandler said.

KIWI FALLS

The New Zealand dollar sank as much as 1.21% to $0.5612 after the Reserve Bank of New Zealand held interest rates at 2.75%, surprising a large majority of economists who had expected a rate hike.

The Bank of Canada hiked its key policy rate for the first time in more than three years and said further increases ​might be needed to prevent soaring energy costs from fueling broader inflation.

The Canadian dollar was flat at C$1.405 per US dollar. 

"The Reserve Bank of New Zealand disappointed markets and the New Zealand dollar sold off in response. It's the weakest of the G10 currencies. The Bank of Canada just hiked rates but it was expected. The Canadian dollar hasn't reacted much to the hike," Chandler said.

The European Central Bank and the Bank of Japan are also expected to deliver monetary policy verdicts on Thursday and Friday, respectively, with both central banks expected to leave policy rates unchanged.   

(Reporting by Chibuike Oguh in New York; Editing by Alexandra Hudson)