Investing.com – The U.S. dollar fell on Tuesday, trading near its lowest levels this year, amid growing bets that the Federal Reserve will cut interest rates this week, and possibly by a large amount.
At 04:40 ET (08:40 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 100.299.
Fed meeting begins
The US central bank begins its final policy-setting meeting later in the session, amid growing expectations that it will cut interest rates by 50 basis points at the end of Wednesday’s meeting.
CME Fedwatch data showed that traders are pricing in a 68% chance of a 50 basis point rate cut and a 32% chance of a 25 basis point rate cut.
“Markets have continued to consolidate their bearish stance on the dollar ahead of tomorrow’s FOMC announcement,” analysts at ING Bank said in a note. “These FX dynamics are a direct result of the steady repricing of interest rate expectations, with the swap market now pricing in a 70% (43bp) implied probability of a 50bp cut tomorrow.”
Tuesday’s economic data docket includes the latest US figures, which are expected to contract on a monthly basis in August, potentially adding weight to the case for a 50 basis point rate hike.
Euro could see bigger gains amid recession – BNP Paribas
In Europe, the euro rose 0.1% against the US dollar to 1.1136, not far from its highest level this year at 1.1201 despite the European Central Bank cutting interest rates by 25 basis points last week.
Germany’s ZEW economic sentiment survey is due later in the session and is expected to show a slight deterioration this month as conditions in the euro zone’s largest economy remain challenging.
The euro could continue to rise against the dollar even in the event of a global recession, analysts at BNP Paribas (OTC:) said in a note.
The French bank points to the dollar’s use as a high-yielding currency, which has not been the case historically, as a reason, because this means the dollar is more vulnerable to falling as interest rates in the United States fall.
Another factor is that the US Federal Reserve has pushed interest rates above their neutral level compared to many other central banks, while interest rate differentials between the euro and peripheral governments in the currency bloc have become less sensitive to periods of risk aversion, which is positive for the euro.
Sterling fell slightly to 1.3213, although the pound has been the best performing G10 currency this year, up 3.9% against the dollar.
The European Central Bank is due to meet on Thursday and is expected to keep its key interest rate at 5%, after starting to ease monetary policy with a 25 basis point cut in August.
Yen eyes BOJ meeting
The yen fell 0.1% against the dollar to 140.50, keeping the pair close to its lowest levels this year.
The yen was supported by the prospect of a U.S. interest rate cut, while traders were also seen building long positions in the yen ahead of Friday’s meeting.
Analysts do not expect the Bank of Japan to raise interest rates. But policymakers are expected to take a hawkish stance and expect interest rates to rise in the face of rising inflation.
The Chinese yuan was little changed at 7.0930, with Chinese local markets closed for a second straight session. But a slew of weak economic readings from the country over the weekend set the yuan up for further weakness.