Dollar Steady, Investors Eye U.S. Inflation Data and Fed Rate Cuts

The dollar held steady as the market anticipates U.S. inflation data and potential Federal Reserve rate cuts. Investors are debating whether the Fed will deliver a 25 or 50 basis point cut. Global currencies, including the yen and yuan, showed varied movements amid U.S. and Chinese economic updates.

On Tuesday, the dollar remained steady, while the yen moved away from its one-month high. Investors are closely watching for U.S. inflation data and reassessing the likelihood of significant interest rate cuts from the Federal Reserve next week. A mixed labor report last Friday left uncertainty about whether the Fed will implement a standard 25 basis point (bps) cut or a more aggressive 50 bps cut at its upcoming Sept. 17-18 policy meeting.

Traders are eagerly awaiting Wednesday's U.S. consumer price index report for further policy direction. While inflation remains a focus, the Federal Reserve has indicated employment is now a higher priority. August's headline CPI is expected to have risen by 0.2% month-on-month, according to a Reuters poll. A weaker-than-expected reading could increase the likelihood of a 50 bps cut, while a steady figure might keep the debate between a 25 bps or 50 bps cut unresolved, said Charu Chanana, head of currency strategy at Saxo.

China's yuan slightly eased on Tuesday, but losses were limited due to better-than-expected export data, despite imports growing by only 0.5%. U.S. presidential debate coverage and China's inflation data have highlighted weak domestic demand, keeping investors cautious.

Meanwhile, the dollar- yen exchange rate settled at 143.10 yen, slightly declining from gains earlier in the session. The dollar index, which measures the currency against six major currencies, stood at 101.61 after a 0.4% rise on Monday.

Market expectations indicate a full 25 bps rate cut next week, but predictions for a 50 bps cut have dropped to 30%, down from 50% on Friday, according to the CME FedWatch tool. For 2024, traders anticipate 110 bps easing, up from 100 bps.

Key Federal Reserve policymakers signaled readiness for further rate cuts last week, emphasizing the need to address a cooling labor market with policy adjustments. "Fed rate cuts are imminent, but the immediate concern is whether the initial cut will be 25 or 50 basis points," stated Anthony Saglimbene, chief market strategist at Ameriprise Financial. Further, the European Central Bank and Bank of England's upcoming policy moves are also under scrutiny, adding to the global economic uncertainty.

(With inputs from agencies.)