by Kevin Buckland
TOKYO (Reuters) – The dollar hit its lowest level since March against the euro and sterling on Tuesday as signs of an easing U.S. economy strengthened the case for earlier Federal Reserve interest rate cuts.
The U.S. currency also fell to a 2.5-month low against the Swiss franc after data showed a second straight month of slowdown in manufacturing activity and an unexpected drop in construction spending.
Federal funds futures increased the odds of a rate cut in September to about 59.1%, according to the LSEG app.
For comparison, on Friday, when data showed a stabilization of pressure on consumer prices, the exchange rate was around 55%, which helped the dollar suffer its first monthly loss this year in May. At the beginning of last week, bets were just under 50%.
The key test will be Friday’s monthly US employment data.
“The Federal Reserve’s continued high interest rate policy is under scrutiny as it continues to impact the U.S. economy,” James Kniveton, senior corporate currency dealer at Convera, wrote in a note to a client. “Analysts are closely monitoring upcoming employment data for signs of economic stress.”
Now, the first quarter rate hike will be fully priced in at the November Fed meeting, with a total of 41 basis points of rate tightening by the end of the year.
November “could be a tumultuous time for the U.S. dollar due to the confluence of a potentially pivotal Federal Reserve meeting and the U.S. election,” Kniveton said.
The Fed’s next policy meeting will end on June 12, when consumer price data will also be released. Traders and analysts see no risk of policy change at this meeting, but officials will update their economic and interest rate forecasts.
The exchange rate, which measures the currency against the euro, sterling, yen and two other major currencies, was little changed at 104.08, after previously falling below 104 for the first time since April 9.
For the first time since March 21, the euro rose to as much as $1.0916.
The European Central Bank telegraphed that policymakers would cut interest rates at its meeting on Thursday, but a rise in inflation in last week’s data may have officials wondering when the next easing will come.
The Swiss franc hit its highest level since March 21 at 0.8947 per dollar ahead of the release of the latest local Consumer Price Index (CPI) reading.
The augment in inflation pressures reported a month ago helped reduce the likelihood of the Swiss National Bank cutting interest rates this month to just a coin flip, after it became the first major central bank to begin its monetary easing cycle in March.
“A further increase in today’s CPI inflation should reduce expectations for further interest rate cuts” and see franc test resistance at 0.8930, DBS strategists wrote in a note.
Sterling traded at $1.2818, last seen on March 14.
However, the dollar gained 0.24% to 156.39 yen, rebounding from an overnight low of 155.95, the first time below 156 since May 21.
The Bank of England and the Bank of Japan will also hold potentially crucial policy meetings later this month, and investors will be watching for clues as to when the former will start cutting interest rates and the latter will raise them again.
