Dollar Dips Ahead of U.S. Inflation Data and Presidential Debate

The dollar edged down on Tuesday before key U.S. inflation data and a significant presidential debate. Investors await the Federal Reserve's decision on rate cuts, while the European backdrop influences the euro. Global currency shifts are noted with movements in China's yuan, the pound, and the Australian and New Zealand dollars.

The dollar edged down on Tuesday ahead of crucial U.S. inflation data and a highly anticipated televised U.S. presidential debate, both of which could influence interest rate forecasts. Last week's mixed labor report left ambiguities around whether the Federal Reserve will opt for a typical 25 bps rate cut or a more substantial 50 bps reduction at its Sept. 17-18 policy meeting. Traders are now keenly awaiting Wednesday's U.S. consumer price index report.

Barclays strategists mentioned that the dollar usually weakens ahead of Federal Reserve easing cycles and tends to overestimate rate cuts during soft economic landings. Despite this, they suggested that much of the currency's movement is likely behind us. In the meantime, the political arena remains in focus, with investor attention also targeting the presidential debate later on Tuesday, which holds substantial implications for the November election.

Should Donald Trump emerge victorious, investors project the dollar will rise, bolstered by tariffs and increased fiscal spending that could boost interest rates further. Currently, the dollar index, which compares the U.S. currency against six major counterparts, stood at 101.59, having slid 0.06%.

Market indicators such as the CME FedWatch tool reveal that traders are fully pricing in a 25 bps rate cut for next week, with the likelihood of a 50 bps cut dropping to 30%, from 50% previously noted on Friday. Looking ahead, traders foresee 110 bps of easing in 2024, up from around 100 bps across the remaining three meetings.

Fed policymakers indicated a readiness to commence a series of rate cuts, with Governor Christopher Waller supporting either consecutive cuts or larger cuts if justified by data. The euro was recently at $1.1043 after a 0.5% decline on Monday.

European political dynamics are also under scrutiny, including a stalemate in France and uncertainties in the EU post-German regional elections. Jane Foley from RaboBank highlighted that the euro's resilience this year stems from the region's current account surplus and market indifference to budget issues in EU countries like Italy and France. Nonetheless, fiscal policy is expected to take center stage in the latter half of the year, potentially impacting the euro.

Barclays economists predict that political instability will obstruct fiscal adjustments in the eurozone through 2024-2025. Former ECB chief Mario Draghi emphasized Europe's need for massive investment to stay competitive economically, while proposing new mutual funding sources, which German-led nations have been hesitant to endorse. "These issues should cap euro/dollar rallies going forward," argued RaboBank's Foley.

Attention will also be on the European Central Bank's communique on Thursday post-policy meeting, with traders anticipating 63 bps of easing this year. The dollar gained 0.15% to 143.42 yen, recovering from a one-month low of 141.75 on Friday. Last week, the greenback declined 2.7% against the yen.

China's yuan saw slight declines, balanced by better-than-expected export data. Conversely, import growth was tepid at 0.5%, following lower-than-anticipated inflation figures on Monday, reflecting subdued domestic demand.

The pound strengthened, buoyed by robust UK employment growth, and was last up 0.15% at $1.3095. The Australian dollar was at $0.66659 after touching over a three-week low, while the New Zealand dollar remained near its three-week low at $0.6155.

(With inputs from agencies.)