Dollar Dips as Fed Rate Cut Speculations Intensify

The dollar weakened against major currencies, pressured by expectations of U.S. Federal Reserve interest rate cuts. This sentiment was reinforced by a soft U.S. producer price reading. Meanwhile, risk-sensitive currencies like the Aussie and sterling firmed up. The New Zealand dollar fell after a surprising rate cut by the Reserve Bank of New Zealand.

The dollar remained on the back foot on Wednesday after tumbling versus major peers overnight as a benign reading for U.S. producer prices reinforced bets on Federal Reserve interest rate cuts this year. New Zealand's dollar dropped sharply from a four-week high after the Reserve Bank of New Zealand reduced the key cash rate and flagged more cuts to come, surprising some market participants.

The yen strengthened against the dollar, buoyed by lower U.S. bond yields, with crucial U.S. consumer price index figures looming later on Wednesday. Japanese Prime Minister Fumio Kishida's decision to not run for reelection in his party's leadership race next month had little effect on markets, analysts said.

Meanwhile, risk-sensitive currencies like sterling and the Australian dollar remained firm after the unexpected softening in U.S. inflation buoyed equities. The Aussie briefly reached a more than three-week peak, while sterling traded near a more than two-week high following its best one-day performance against the dollar since late April. The dollar index - which measures the currency against six major rivals, including sterling, the euro and the yen - was steady at 102.61 as of 0315 GMT, after slumping 0.49% overnight.

Traders were already certain that the Federal Open Market Committee (FOMC) would lower rates at its September meeting before the producer price data, but ramped up bets for a super-sized 50 basis point cut to 53.5% from 50% a day earlier, according to CME's FedWatch Tool. Commonwealth Bank of Australia analysts expect the dollar to be in a holding pattern before the release of U.S. CPI data, but then see risks tilted toward further weakness.

'We expect the market to double down on large interest rate cuts by the FOMC this year if the core CPI increases by 0.1%/month or less, (whereas) we expect the market to largely play down the core CPI if it increases by 0.2%/month or 0.3%/month,' Carol Kong, a currency strategist at CBA, wrote in a client note. KIWI DROPS AFTER RATE CUT

The kiwi fell as much as 1.08% after the RBNZ cut the cash rate by a quarter point, when only about half of economists and a little more than two-thirds of traders had bet on such a move. That reversed earlier gains that took it to the highest since July 18 at $0.6084. It was last trading 1.02% weaker at $0.6015. It was the central bank's first easing since early 2020, and came a year earlier than its own projections.

'The RBNZ has completed a 180-degree dovish backflip, cutting interest rates to bring much-needed relief for households and businesses just three months after it raised the possibility of additional rate hikes,' said Tony Sycamore, a market analyst at IG. The Aussie edged down 0.23% to $0.66185 in sympathy with the kiwi, after earlier rising to $0.66395 for the first time since July 23.

Sterling was steady at $1.2862 following a 0.76% rally on Tuesday when it got an additional boost from data showing a surprise drop in the UK's jobless rate. The euro was flat at $1.0991 after rising to $1.099975 on Tuesday for the first time since Aug. 5.

The dollar dropped 0.31% to 146.40 yen, with U.S. 10-year Treasury yields edging down to 3.85% in Asian hours, after declining 5.5 basis points overnight. In Japan, Kishida announced he would step down in September, ending a three-year term marred by political scandals and paving the way for a new premier to helm Japan's ongoing economic recovery.

'Probably the impact on the economy and financial markets should be relatively limited because Mr. Kishida's policies, if I try to characterize them, are really wide ranging and not focused on specific themes,' said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management. 'The big question would be who would be next. That will be more important.'

(With inputs from agencies.)