Dollar Under Pressure as U.S. Easing Cycle Looms

The dollar is near its lowest levels for the year ahead of a U.S. easing cycle, which could start with a significant rate cut. The euro, yen, and sterling are reacting differently, with each currency showing varied movement based on respective economic conditions and central bank outlooks.

The dollar hovered near its lowest levels of the year on Tuesday, a day before the expected start of a U.S. easing cycle that could begin with a significant rate cut.

The euro hovered around $1.1132, close to the year's high of $1.1201, and the yen eased to 140.71 after briefly strengthening during holiday-thinned trade on Monday.

The yen's fall this year positions it for a potential rally if the U.S. central bank takes a dovish stance. A break below 140.00 would pave the way to January's low of 127.215. Fed funds futures indicate a 65% chance of a 50 basis point rate cut, a notable increase from 30% just a week ago. Media reports have heightened the prospect of aggressive easing.

Jane Foley, senior forex strategist at Rabobank, stated that any sign of weakness in U.S. economic data on Tuesday could bolster market speculation of a 50 basis points rate cut. August's retail sales and industrial production figures are crucial as the Fed's two-day meeting concludes on Wednesday.

Macquarie strategists believe that regardless of a -25bps or -50bps cut, the Fed's messaging will be dovish, potentially weakening the USD against major currencies, particularly the JPY.

Sterling, the best-performing G10 currency this year, continues to rise against the dollar due to Britain's economic resilience and persistent inflation. It surpassed $1.32, reaching $1.32095 at 1105 GMT.

The Australian and New Zealand dollars rallied after Monday's trade, with focus remaining on the Fed rather than China's struggling economy. The U.S. dollar index stayed at 100.7, near its 2024 low of 100.51.

(With inputs from agencies.)