The dollar languished at its lowest point since April against the euro and sterling on Tuesday, as indications of a weakening U.S. economy bolstered the case for earlier Federal Reserve interest rate cuts.
The U.S. currency hovered near a two-week low against the yen after data revealed a second consecutive month of slowdown in manufacturing activity and an unexpected drop in construction spending.
Following the data release, fed funds futures increased the likelihood of a rate cut in September to around 59.1%, according to LSEG's rate probability app. This is up from around 55% on Friday when data showed a stabilization in consumer price pressures, leading to the dollar's first monthly loss of the year in May. Earlier last week, the odds were slightly below 50%.
A crucial test will be the monthly U.S. payroll figures due on Friday.
"The persistent high-interest-rate policy of the Federal Reserve is under scrutiny as it continues to weigh on the U.S. economy," wrote James Kniveton, senior corporate FX dealer at Convera, in a client note. "Analysts are closely monitoring the upcoming job data for indications of economic strain."
Currently, a first quarter-point rate increase is fully priced in by the Fed's November meeting, with a total of 41 basis points of tightening expected by year-end.
"November is poised to be a tumultuous period for the U.S. dollar due to the confluence of a potentially decisive Federal Reserve meeting and the U.S. elections," Kniveton said.
The Fed's next policy meeting concludes on June 12, coinciding with the release of consumer price data. Traders and analysts do not anticipate a policy change at this meeting, but officials will update their economic and interest-rate projections.
The dollar index, which measures the currency against the euro, sterling, yen, and three other major peers, eased 0.05% to 103.99, its lowest level since April 9.
The euro increased by 0.11% to $1.09155, a level last seen on March 21. The European Central Bank has signaled that policymakers will cut rates at their meeting on Thursday, but last week's inflation data may cause them to reconsider the timing of the next rate cut.
Sterling rose 0.05% to $1.2814, its strongest since March 14. However, the dollar added 0.14% to 156.255 yen, recovering from the overnight low of 155.95, its first time below 156 since May 21.
The Bank of England and Bank of Japan also have potentially pivotal policy meetings later this month.
Elsewhere, the New Zealand dollar climbed to $0.6194 for the first time since March 8, while the Australian dollar traded flat at $0.66895, holding close to the two-week high of $0.6695 reached overnight.
Paraphrasing text from "Reuters" all rights reserved by the original author.
