Dollar Nears Yearly Low Amid Expected Fed Rate Cut

The U.S. dollar is trading near its lowest levels of the year, as markets anticipate an aggressive rate cut by the Federal Reserve. The euro and yen both fluctuate, with the yen showing promise for a rally. Sterling leads G10 currencies, while Australian and New Zealand dollars also see gains amid Fed focus.

The U.S. dollar hovered near its lowest levels of the year on Tuesday, with markets anticipating the onset of an easing cycle by the Federal Reserve—a move that could begin with a substantial rate cut.

The euro remained steady at approximately $1.1123 during the Asia session, close to its yearly high of $1.1201. Meanwhile, the yen saw some volatility, briefly strengthening during holiday-thinned trading before settling at 140.77 as Tokyo markets reopened.

This anticipation of a dovish shift by the U.S. central bank has caused rallies in Fed fund futures, indicating a 67% probability of a 50 basis point rate cut. Market sentiment has been influenced by media reports suggesting a more aggressive easing approach by the Fed.

Strategists from Macquarie noted that regardless of a 25 or 50 basis point cut, the Fed's dovish tone could weaken the USD against major currencies, particularly the JPY, due to contrasting central bank outlooks. The Bank of Japan is expected to maintain steady policy this Friday but may signal future rate hikes, potentially making its October meeting significant.

Sterling, showing resilience in Britain's economy, led G10 currency performance this year with a 3.9% rise against the dollar. It surged past $1.32, reaching $1.3203 in the Asia session. Expectations are that the Bank of England will keep rates steady at 5%, despite a 36% chance of a rate cut priced in by markets.

Both Australian and New Zealand dollars saw gains on Monday and continued to rise on Tuesday, trading at $0.6746 and $0.6189, respectively. Traders focused on the Fed's actions over concerns about China's sluggish economy. Chinese markets are closed for the Mid-Autumn Festival until Wednesday, though the yuan remains steady in offshore trade.

The U.S. dollar index rested at 100.7, close to its recent low of 100.51. Key upcoming data includes U.S. retail sales and Canadian CPI figures, but the market's primary focus remains the Fed's two-day meeting concluding Wednesday.

(With inputs from agencies.)