LONDON (Reuters) – The dollar traded near its lowest levels this year on Tuesday, on the eve of the expected start of U.S. monetary easing that markets are betting could start with a big interest rate cut.
The euro was steady at around $1.1133 by 08:30 GMT, not far from its highest level this year at $1.1201.
The yen fell to 140.58 after rising to the stronger side of 140 over the holiday, which led to thin trading on Monday.
The US dollar has recorded its biggest decline this year and therefore has the most room to recover amid the dovish shift from the US central bank. A sustained break of 140.00 would open the way to its lowest level since January at 127.215.
Fed funds futures rose, pushing the odds of a 50 basis point rate cut to 69%, from 30% a week ago. The odds have narrowed sharply after media reports revived the prospect of more aggressive rate easing.
“Any sign of weakness in (Tuesday’s U.S. economic data) will only add to market speculation that there could be a 50 basis point move,” said Jane Foley, chief foreign exchange strategist at Rabobank.
US retail sales and industrial production figures for August are due later today, although all eyes are on the Federal Reserve’s two-day meeting that concludes on Wednesday.
“Regardless of which -25bp or -50bp the Fed takes on Wednesday, we believe the Fed’s message will be ‘dovish,’” Macquarie strategists said in a note to clients.
“The US dollar could weaken against major currencies on a very dovish note, even with a 25bp rate cut… and we are likely to see the biggest losses, if any, against the Japanese yen,” they said.
“This is because the divergence between central bank expectations will remain most pronounced between the Fed and the Bank of Japan, for now.”
The Bank of Japan is expected to keep policy steady on Friday but signal further interest rate hikes, potentially turning the next meeting in October into a live one.
Sterling, the best performing G10 currency this year with a 3.9% rise against the dollar, also led the charge against the greenback thanks to signs of resilience in the British economy and stabilising inflation.
Sterling broke above $1.32 on Monday, trading at $1.32145 at 08:30 GMT. The Bank of England is widely expected to keep interest rates on hold at 5% when it meets on Thursday, although markets have priced in a 39% chance of another rate cut.
The Australian and New Zealand dollars also rose on Monday, buying $0.6761 and $0.6205 respectively on Tuesday, as traders focused on the Federal Reserve rather than weekend signs of worsening troubles in China’s slowing economy.
Chinese markets were closed for the Mid-Autumn Festival until Wednesday, although the yuan held steady at 7.097 in offshore trade, settling into a new range.
The dollar held steady at 100.6, not far from its 2024 low of 100.51 last month.
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