The dollar traded near its lowest levels of the year on Tuesday, ahead of the expected start of a U.S. easing cycle that markets are betting could begin with a massive rate cut.
The euro rose overnight to $1.1138 and was trading in that area at the start of the Asian session, not far from the year’s high against the dollar of $1.1201.
The yen made a foray toward the stronger 140 side during light commodity trading on Monday, then retreated to 140.96 as traders returned to their desks in Tokyo.
It has fallen further this year, so it has more room to recover if the US central bank does anything dovish.
A sustained break of the 140.00 level would open the way to a low from last January at 127.215.
Federal funds futures rose on Monday, raising the probability of a 50-basis-point cut to 67%, up from 30% a week ago. The odds were cut sharply after media reports revived the prospect of more aggressive easing.
“Regardless of which of the two steps, -25bps or -50bps, the (Fed) chooses on Wednesday, we think the Fed’s message will be ‘dovish,'” the Macquarie strategist said in a note to clients.
“The dollar could weaken against major currencies on a very dovish note, even with a -25 basis point cut… the biggest losses, if any, are likely to be experienced against the yen,” they said.
“This is because the contrast between central banks’ outlooks will remain starkest between the Fed and the BoJ, for the time being.”
The Bank of Japan is expected to hold policy steady on Friday but signal further interest rate increases, possibly making the next meeting in October a busy one.
Sterling, the best-performing G10 currency this year with a 3.9% gain against the dollar, has also led the charge against the greenback thanks to signs of resilience in the British economy and sticky inflation.
It topped $1.32 on Monday and traded at $1.3209 in early Asian trading. The Bank of England is widely expected to leave rates unchanged at 5% when it meets on Thursday, although markets have priced in a 36% chance of another cut.
The Australian and New Zealand dollars also rose on Monday, trading at $0.6750 and $0.6192 respectively on Tuesday as traders focused more on the Fed than on weekend signals of deepening troubles in China’s sluggish economy.
Chinese markets will be closed until Wednesday for the Mid-Autumn Festival break, although the yuan held firm at 7.1000 in offshore trading as it settles into a new range.
The US dollar index weakened 0.4% overnight to 100.7, not far from its 2024 low hit last month at 100.51.
US retail sales data and Canadian CPI figures are due later in the session, though all eyes are on Wednesday’s Fed meeting.
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