SINGAPORE- The dollar traded near its lowest levels of the year on Tuesday, on the eve of the expected start to a US easing cycle that markets are betting may begin with an outsized rate cut.
The euro hovered around $1.1123 in the Asia session, not far from the year’s high of $1.1201.
The yen made a jaunt to the stronger side of 140 during holiday thinned trade on Monday, and had eased back to 140.77 as dealers returned to their desks in Tokyo.
It has fallen the most this year so has the most room to rally on a dovish 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 have rallied to push the chance of a 50 basis point rate cut to 67 percent , against 30 percent a week ago. The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing.
“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 percent 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.
