Dollar stuck by 50 basis points Fed cuts bets by Reuters

SINGAPORE (Reuters) – 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 start with an excessive rate cut.

The euro rose overnight to $1.1138 and traded there early in the Asian session, not far from a year’s high against the dollar at $1.1201.

The yen made a trip to the stronger side of 140 during light holiday trading on Monday and fell back to 140.96 as dealers returned to their offices in Tokyo.

It has fallen the most this year, so it has the most room to rally in a smooth turn from the US central bank.

A sustained break of 140.00 would open the way to a low from last January at 127.215.

Fed funds futures rose on Monday to push the chance of a 50 basis point rate cut to 67%, up from 30% a week ago. The odds narrowed sharply after media reports revived the prospect of more aggressive easing.

“Regardless of which of -25 bps or -50 bps (the Fed) goes with on Wednesday, we think Fed messaging will be dovish,” the Macquarie strategist said in a note to clients.

“The USD could weaken on the upside on a very dovish tone, even with a -25bp cut… the biggest losses, if any, are likely to come against the JPY,” they said these.

“This is because the contrast between central bank outlooks will remain strongest between the Fed and the BoJ, for now.”

The Bank of Japan is expected to hold policy steady on Friday, but signals further interest rate hikes are ahead, likely making the next meeting in October a lively one.

Sterling – the best performing G10 currency this year, up 3.9% against the greenback – also led the charge against the greenback on signs of resilience in the UK economy and volatile inflation.

On Monday, it crossed $1.32 and bought $1.3209 in early Asian session. The Bank of England is widely expected to leave rates on hold at 5% when it meets on Thursday, although markets have priced a 36% chance of another cut.

The Australian and New Zealand dollars also rose on Monday and bought $0.6750 and $0.6192 respectively on Tuesday as traders focused more on the Fed than weekend signs of worsening problems in China’s sluggish economy .

Chinese markets are closed for the Mid-Autumn Festival break until Wednesday, although the yuan was firm at 7.1000 in offshore trade as it settles into a new range.

It eased 0.4% overnight to 100.7, not far from the 2024 low hit last month at 100.51.

US retail sales data and Canadian CPI figures are due later in the session, although all eyes are on the Fed meeting on Wednesday.