Dollar wallows at multi-month lows as Fed cut bets grow

The US dollar remained weak against the euro and sterling on Tuesday, hitting its lowest level since April. This was due to indications of a weakening US economy, which further supported the argument for earlier interest rate cuts by the Federal Reserve. The US currency also struggled against the yen, hovering near a two-week low, following data that revealed a second consecutive month of manufacturing slowdown and an unexpected decrease in construction spending. As a result, the probability of a rate cut in September rose to 59.1%, according to LSEG’s rate probability app, up from around 55% on Friday. The dollar had experienced its first monthly loss of the year in May, partly due to stabilizing consumer price pressures. The upcoming monthly US payroll figures on Friday will be a crucial indicator for the situation.
According to James Kniveton, a senior corporate FX dealer at Convera, the continuous high-interest-rate policy of the Federal Reserve is being closely examined as it continues to have an impact on the U.S. economy. Analysts are paying close attention to the upcoming job data to assess any signs of economic strain.

Currently, the market has fully priced in a quarter-point rate increase by the Fed’s November meeting, with a total of 41 basis points of tightening expected by the end of the year.

Kniveton highlights that November could be a volatile period for the U.S. dollar due to the combination of a potentially decisive Federal Reserve meeting and the U.S. elections.

The Fed’s next policy meeting is scheduled to conclude on June 12, coinciding with the release of consumer price data. Although traders and analysts do not anticipate any policy changes at this meeting, officials will provide updates on their economic and interest-rate projections.
The dollar index, which gauges the currency’s performance against major counterparts such as the euro, sterling, and yen, dipped by 0.05% to 103.99, reaching its lowest level since April 9.

Meanwhile, the euro strengthened by 0.11% to $1.09155, marking its highest point since March 21.

Although the European Central Bank has hinted at rate cuts during their upcoming meeting on Thursday, a recent uptick in inflation data may cause policymakers to reconsider the timing of any further easing measures.

Sterling also experienced a slight increase of 0.05% to $1.2814, hitting its highest level since March 14.

On the other hand, the dollar managed to gain 0.14% against the yen, rising from its overnight low of 155.95, which was the first time it had fallen below 156 since May 21.

Both the Bank of England and the Bank of Japan will be holding crucial policy meetings later this month.

In other news, the New Zealand dollar reached $0.6194 for the first time since March 8, while the Australian dollar remained steady at $0.66895, staying close to its two-week high of $0.6695 from the previous day.