LONDON (Reuters) -The dollar traded near its lowest levels of the year on Tuesday, on the eve of the expected start to a U.S. easing cycle that markets are betting may begin with an outsized rate cut.
The euro hovered around $1.1133 at 08:30 GMT, not far from the year’s high of $1.1201.
The yen JPY=EBS eased back to 140.58 after a jaunt to the stronger side of 140 during holiday thinned trade on Monday.
It has fallen the most this year so has the most room to rally on a dovish turn from the U.S. central bank. A sustained break of 140.00 would open the way to a low from last January at 127.215.
Fed funds futures have rallied to push the chance of a 50 basis point rate cut to 69%, against 30% a week ago. The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing.
“Any sign of weakness in (Tuesday’s U.S. economic data) is only going to reinforce market speculation that there could be a 50 basis points move,” said Jane Foley, senior forex strategist at Rabobank.
August U.S. retail sales and industrial production figures are expected later today, although all eyes are on the Fed’s two-day meeting which concludes on Wednesday.
“Regardless of which of -25bps or -50bps the (Fed) goes with on Wednesday, we do think that the Fed’s messaging will be ‘dovish,'” said Macquarie strategists in a note to clients.
“The USD could weaken against the majors on a very dovish tone, even with a -25bp cut … the largest losses, if any, are still likely to be experienced against the JPY,” they said.
“That’s because the contrast between central bank outlooks will remain starkest between the Fed and the BOJ, for the time being.”
The Bank of Japan is expected to keep policy steady on Friday but signal that further interest rate hikes are coming, perhaps turning the next meeting in October into a live one.
Sterling – the best performing G10 currency this year with a 3.9% rise on the dollar – has also led the charge against the dollar thanks to signs of resilience in Britain’s economy and stickiness in inflation.
It broke above $1.32 on Monday, buying $1.32145 at 08:30 GMT. The Bank of England is generally expected to leave rates on hold at 5% when it meets on Thursday, though markets have priced in a 39% chance of another cut.
The Australian and New Zealand dollars also rallied through Monday and bought $0.6761 and $0.6205, respectively, on Tuesday, as traders focused more on the Fed rather than weekend signs of deepening trouble in China’s sluggish economy.
Chinese markets are closed for the Mid-Autumn Festival break until Wednesday, though the yuan was firm at 7.097 in offshore trade as it settles into a new range.
The U.S. dollar index held at 100.6, not far from its 2024 low made last month at 100.51.
(Reporting by Tom Westbrook and Linda Pasquini; Editing by Lincoln Feast, Jacqueline Wong and Louise Heavens)
