Dollar at seven-month low on reduced bets, Powell speech in focus by Reuters

By Ankur Banerjee

SINGAPORE (Reuters) – The dollar settled near a seven-month low on Tuesday on bets the U.S. central bank will start cutting interest rates next month, as traders braced for comments from Federal Reserve Chairman Jerome Powell on Friday.

The dollar’s weakness lifted the euro to its highest level this year, while sterling was perched near a one-month peak. The emerging market currency index was also at a record high.

The Japanese yen was a shade stronger at 146.50 per dollar, nearing a near two-week high it hit in the previous session, but still off the seven-month high of 141.675 it hit at the start of the month of August.

The focus this week will be on Powell’s speech in Jackson Hole, with investors likely not to hesitate to place big bets ahead of the event.

Investors widely expect Powell to acknowledge the case for a rate cut and will weigh his words on whether the Fed will start with a 25 basis point cut or a 50 bps cut in September.

Joseph Capurso, head of international economics at the Commonwealth Bank of Australia (OTC:), expects Powell to keep the option for delayed or higher cuts subject to the next US data on inflation and wages.

“In our view, the economic circumstances call for a benchmark of 25bp rather than an exaggerated cut in the funds rate,” Capurso said, adding that the dollar was likely to continue to fall this week on the prospect of a rate cut.

The euro last touched $1.1080 on Tuesday, after touching $1.108775, its highest level since Dec. 28 in early trading. The single currency is up 2.4% this month, on course for its strongest monthly performance since November.

Sterling was steady at $1.2985 in early trade after hitting a one-month high of $1.2998 in the previous session.

which measures the US currency against six rivals, hit its lowest since Jan. 2 of 101.82 on Tuesday. The index fell more than 2% in August and is set for a second month in the red.

Markets are pricing in a 24.5% chance of a 50bps cut in September, down from 50% a week ago, with a 25bps cut given odds of 75.5%, the CME tool showed FedWatch. Retailers are pricing in 93 bps of discounts this year.

“The encouraging US macro context of solid domestic demand activity and moderate disinflation suggests the Fed is unlikely to cut the funds rate as much as it is currently priced in,” said Elias Haddad, chief markets strategist at Brown Brothers Harriman.

“As such, there is room for an upward reassessment of Fed funds rate expectations in favor of USD and Treasury yields.”

A slim majority of economists polled by Reuters expect the US central bank to cut rates by 25 bps at each of its three remaining meetings in 2024.

Investors’ attention will also be on the minutes of the Fed’s latest meeting, due to be released on Wednesday.

The Australian dollar was 0.12% lower at $0.6725, while the New Zealand dollar was little changed at $0.61135.