LONDON (Reuters) – The dollar held near its lowest levels this year on Tuesday, a day before the expected start of a U.S. monetary easing cycle that markets say could start with a significant interest rate cut.
The euro hovered around $1.1132, not far from its one-year high of $1.1201.
The yen weakened to 140.71 after rising above 140 on Monday during holiday trading.
It has fallen the most this year, so it has the most room to recover from the Fed’s dovish turn. A sustained break of 140.00 would open the door to last January’s low of 127.215.
Fed funds futures rose, raising the chance of a 50-basis-point rate cut to 65%, up from 30% a week ago. The odds fell sharply after media reports revived the prospect of more aggressive easing.
“Any sign of weakness (in Tuesday’s U.S. economic data) will only reinforce market speculation that a 50 basis point move could occur,” said Jane Foley, senior currency strategist at Rabobank.
US retail sales and industrial production data for August are expected to be released on Tuesday, but all eyes will be on the Federal Reserve’s two-day meeting, which ends on Wednesday.
“Regardless of which rate (-25 or -50bp) (the Fed) decides on Wednesday, we believe the Fed’s message will be dovish,” Macquarie strategists said in a note to clients.
“USD could weaken against majors in a very dovish tone, even with a 25bps cut… the heaviest losses, if any, will continue to be against JPY,” they said.
“This is because the contrast between central bank outlooks will remain greatest for now between the Fed and the BOJ.”
The Bank of Japan is expected to keep policy unchanged on Friday but signal more interest rate hikes are coming, which could cause its next meeting in October to become the current meeting.
Sterling – the best-performing currency in the G10 this year, up 3.9% against the dollar – also strengthened against the greenback on signs of resilience in the British economy and stability in inflation.
It broke through $1.32 on Monday, buying $1.32095 at 11:05 GMT. The Bank of England is generally expected to keep rates at 5% when it meets on Thursday, although markets have priced in a 39% chance of another cut.
The Australian and New Zealand dollars were at $0.67555 and $0.6198 respectively after rising on Monday as investors focused more on the Fed than on weekend signs of deepening problems in China’s sluggish economy.
Chinese markets will be closed until Wednesday for the Mid-Autumn Festival, although the yuan remained stable at 7.095 in overseas markets, settling at a modern level.
The indicator remains at 100.7, just off last month’s 2024 low of 100.51.
