TOKYO: The dollar languished at its lowest since March against the euro and sterling on Tuesday as signs of a softening US economy boosted the case for earlier Federal Reserve interest rate cuts.
The US currency also slumped to its weakest in 2 1/2 months versus the Swiss franc after data showed a second straight month of slowdown in manufacturing activity and an unexpected decline in construction spending.
Following the data, fed funds futures increased the chances of a rate cut in September to around 59.1%, according to LSEG’s rate probability app.
That compares with odds of around 55% on Friday, when data showed a stabilisation in consumer price pressures, helping knock the dollar to its first monthly loss of the year in May. Wagers were slightly below 50% earlier last week.
A key test comes in the form of monthly US payroll figures on Friday.
“The persistent high-interest-rate policy of the Federal Reserve is under scrutiny as it continues to weigh on the US economy,” James Kniveton, senior corporate FX dealer at Convera, wrote in a client note.
“Analysts are closely monitoring the upcoming job data for indications of economic strain.”
Currently, a first quarter-point rate increase is fully priced by the Fed’s November meeting, with a total of 41 basis points of tightening seen by year-end.
Currencies tread cautiously after US inflation report, focus on ECB
November “is poised to be a tumultuous period for the US dollar due to the confluence of a potentially decisive Federal Reserve meeting and the US elections,” Kniveton said.
The Fed’s next policy meeting concludes on June 12, when consumer price data is also due.
Traders and analysts don’t see any risk of a policy change at that gathering, but officials will update their economic and interest-rate projections.
The dollar index, which measures the currency against the euro, sterling, swissie, yen and two more major peers, was little changed at 104.08, after earlier dipping below 104 for the first time since April 9.
The euro rose as high as $1.0916 for the first time since March 21.
The European Central Bank has telegraphed that policy makers will cut rates at their meeting on Thursday, but a pick-up in inflation in data last week may give officials pause when considering when next to ease.
The Swiss franc touched its strongest level since March 21 at 0.8947 per dollar ahead of the release of the latest reading of local consumer price index (CPI).
A rise in inflationary pressures in data a month ago has helped lower the odds for a Swiss National Bank rate cut this month to just a coin toss, after it became the first major central bank to start its easing cycle in March.
“Another rise in today’s CPI inflation should cull expectations for a back-to-back rate cut,” and see the franc test resistance at 0.8930, DBS strategists wrote in a note. Sterling touched $1.2818, a level last seen on March 14.
However, the dollar added 0.24% to 156.39 yen, clawing its way back from the overnight low of 155.95, its first time below 156 since May 21.
The Bank of England and Bank of Japan also hold potentially pivotal policy meetings later this month, with traders on watch for clues on when the former will begin cutting rates and the latter will raise rates again.
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