After a month of dramatic developments in the currency markets, the Federal Open Market Committee (FOMC) meets for the last time in 2011 on Tuesday 13 December at 19:15 GMT.

Following the conclusion of the European Union summit, the FOMC meeting will be the turn of US policymakers to influence market sentiment. It is expected that the Committee will keep interest rates unchanged between 0-0.25 percent. Another scenario is the announcement of a third round of Treasury bond purchases which may weigh on the greenback. But the absence of what is known as QE3 may be a catalyst for a US dollar rally supported by a heightened risk aversion in the market. Speculators also argue that the Fed may announce a plan to buy mortgage-backed securities instead of treasuries which may boost the ailing US housing market as it continues to constrain the US economy.

However, investors’ real focus will be on the release of the accompanying FOMC statement for clues to any deterioration in central bankers’ economic outlook. Any hawkish statements may push the dollar to fresh highs.

We have seen optimism in the market start to fade following the European Union summit during which European leaders agreed to a series of steps designed to save the euro. Leaders from 26 of the European Union's 27 member nations agreed to draft a new treaty for deeper economic integration in the region, with the UK being the only country to reject this proposal. The question is whether the new treaty can calm investors for long or will they judge it as too little too late. Now investors are focusing their attention on this week’s retail sales figures, which are a measure of inflation in the US and the outcome from the FOMC meeting.

In September, the Fed announced a policy called Operation Twist and Fed Chairman Ben Bernanke emphasized the severity of the recession in the US and the risk that the eurozone debt crisis poses to global economic growth. With this policy, the Fed replaced short-term debt with longer debt bonds resulting in lower long-term interest rates. Additionally, earlier this month, the Fed led a co-ordinated assault by central banks on the European debt crisis, agreeing to ensure European banks would have ready access to dollars.

Since the $600 billion quantitative easing (QE) program ended in June, economic data has shown signs that the US economy is slowly improving. Non-Farm Payrolls showed an increase of 120,000 new employed people in November while the unemployment level surprised investors falling to the lowest level since March 2009 at 8.6% from 9%. Manufacturing PMI, Pending Home Sales, ADP Non-Farm Employment Change, Durable Goods and retail sales all showed higher than expected figures.

During the last interest rate meeting, Bernanke and his colleagues cut economic growth forecasts and also downgraded the inflation outlook for the near term. This raises the possibility of another round of quantitative easing. Lower inflation expectations can encourage monetary stimulus as an increase in money supply into the economy can have an inflationary effect. The minutes also showed that some FOMC policymakers are worried about the slow pace of the US economic recovery saying that the central bank may need to consider implementing further easing policies. Stay tuned this Tuesday for the news from the FOMC and hawkish statements which may influence investors’ appetite for the dollar.

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