Dollar Dips Near Yearly Low Amid Expected U.S. Rate Cut

The U.S. dollar traded near its lowest levels of the year as markets await an expected rate cut by the Federal Reserve. The euro, yen, sterling, and other major currencies rallied while the U.S. dollar index dropped 0.4%. All eyes are on the Fed’s meeting on Wednesday for further cues.

The U.S. dollar traded near its lowest levels of the year on Tuesday as markets anticipate the start of an easing cycle by the Federal Reserve, potentially beginning with an outsized rate cut. The euro rallied overnight to $1.1138, trading close to its yearly high of $1.1201 early in the Asia session.

The yen saw a brief strengthening during Monday's holiday-thinned trade, easing back to 140.96 as Tokyo's dealers returned. Of major currencies, the yen has the most potential to rally if the U.S. central bank adopts a dovish approach.

Fed funds futures surged on Monday, increasing the likelihood of a 50 basis point rate cut to 67%, up from 30% a week earlier. This shift comes after media reports raised the prospect of more aggressive easing by the central bank. Macquarie strategists noted that a dovish tone from the Fed could further weaken the USD, particularly against the JPY.

Sterling rose above $1.32 on Monday, continuing its upward trend against the dollar, with Britain's resilient economy and persistent inflation lending support. The Bank of England is expected to hold rates at 5% in its upcoming meeting, with a 36% chance of a cut.

The Australian and New Zealand dollars also rallied, with traders more focused on the Fed rather than China's economic challenges. Meanwhile, the U.S. dollar index fell 0.4% to 100.7, close to its recent low of 100.51. Market attention is now firmly on the Federal Reserve's meeting on Wednesday.

(With inputs from agencies.)