By Sara Sjolin, MarketWatch

Trump hints he wants to devalue the dollar

The dollar rebounded on Wednesday from a two-month low struck a day earlier, gaining ground amid dollar-holders' hopes the Federal Reserve will strike a hawkish tone in its policy statement.

The Fed will announce its rate decision at 2 p.m. Eastern Time.

The ICE Dollar Index , which measures the greenback against a basket of rival currencies, rose 0.1% to 99.59. The index touched the lowest level since mid-November on Tuesday, according to FactSet data.

"We've seen a quick rebound," in the dollar against the yen, said Daiwa Securities senior FX strategist Yukio Ishizuki. That's evidence that many expect hawkish statements from the Federal Reserve, he said.

Read:Fed to hold interest rates while Congress debates stimulus (http://www.marketwatch.com/story/fed-to-hold-interest-rates-while-congress-debates-stimulus-2017-01-30)

Tuesday's dollar weakness came after President Donald Trump and his trade adviser Peter Navarro hinted the administration would ditch a two-decade old "strong dollar" policy (http://www.marketwatch.com/story/yen-strengthens-amid-uncertainty-over-trump-boj-stance-2017-01-31), suggesting that Japan, China and Germany were benefiting from weaker currencies.

"Every other country lives on devaluation," President Donald Trump said at a meeting with U.S. pharmaceutical executives (http://www.marketwatch.com/story/trump-tells-pharma-ceos-bring-down-drug-prices-2017-01-31) on Tuesday. "They play the devaluation market and we sit there like a bunch of dummies."

The comments initially sent the dollar down more than 1% against the yen to Yen112.08, its lowest since Nov. 30, but the greenback recovered that lost territory to trade at Yen113.23, up from Yen112.81 late Tuesday.

Euro bump

The euro exchanged hands at $1.0799, compared with $1.0798 on Tuesday. The shared currency got a bump higher in the Tuesday session after a U.S. trade adviser told the Financial Times that Germany was using a "grossly undervalued" euro to gain an advantage over trading partners, including the U.S.

Sean Callow, senior currency strategist at Westpac, said the comments come on top of rising tension over a shift in U.S. policy toward protectionism.

"It is increasingly clear that the Trump administration views any large bilateral trade deficit as the result of the U.S. being cheated. As such, Germany is joining China on the trade hit list and will surely stay there," Callow said.

German Chancellor Angela Merkel also rejected the claims at a news conference Tuesday.

SMBC Nikko FX strategist Makoto Noji said investors need to keep watching closely if the latest jawboning has potential to trigger a eurozone crisis.

Read:6 ways Europe could trigger market turmoil in 2017 (http://www.marketwatch.com/story/6-ways-europe-could-trigger-market-turmoil-in-2017-2017-01-31)

While Noji expects Germany to be relatively immune to any upswing in the euro, a further euro appreciation may deliver a serious blow to less competitive economies, such as Italy and France.

"The negative impact from euro appreciation would be as negligible to Germany as a mosquito bite, but Italy's economy could fall into crisis," he said.

In other currencies, the pound rose to $1.2649, up from $1.2578 late Tuesday in New York. Bank of America Merrill Lynch strategists said they were getting ready to go long sterling and that aside from some short-term weakness the "medium-term fundamentals look more positive."

"We expect one final dip in GBP as Article 50 is formally triggered and as the EU formally responds and sets out its negotiating position. We think the crystallization of risks and the start of the countdown to Brexit may prove to be the low in GBP and the opportunity to enter GBP longs," they said in a note out Wednesday.

U.K. Prime Minister Theresa May has pledged to trigger Article 50, the formal beginning of the Brexit process, before the end of March. The U.K.'s House of Commons is slated to vote on legislation to allow the government to invoke Article 50 later on Wednesday.

James Glynn and Hiroyuki Kchi contributed to this report.

(END) Dow Jones Newswires

February 01, 2017 07:07 ET (12:07 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.