By Ankur Banerjee
SINGAPORE (Reuters) – The dollar traded near a seven-month low on Tuesday amid speculation the U.S. Federal Reserve will begin cutting interest rates next month, as traders prepare for comments from Federal Reserve Chairman Jerome Powell on Friday.
The dollar’s weakness pushed the euro to its highest level this year, while the pound sterling was near its monthly high. The emerging market currency index also hit a record high.
The Japanese yen was slightly firmer at 146.50 against the dollar, remaining close to its nearly two-week high from the previous trading session, but still far from the seven-month high of 141.675 it reached in early August.
The focus this week will be on Powell’s speech in Jackson Hole, which will likely discourage investors from placing big bets ahead of the event.
Investors largely expect Powell to acknowledge the case for a rate cut and will analyze his words for clues as to whether the Fed will begin with a 25 or 50 basis point cut in September.
Joseph Capurso, head of international economics at the Commonwealth Bank of Australia, expects Powell to reserve the option of delayed or more extensive cuts, depending on the next release of US data on inflation and payrolls.
“In our view, the economic circumstances require a standard 25 basis point cut rather than an excessive cut in the funds rate,” Capurso said, adding that the dollar is likely to fall further this week on the prospect of rate cuts.
The euro was last at $1.1080 on Tuesday, after hitting $1.108775 in early trading, its highest since December 28. The single currency is up 2.4 percent this month and on track for its strongest monthly performance since November.
The pound remained stable at $1.2985 in early trading, after hitting a one-month high of $1.2998 in the previous session.
The dollar index, which measures the US currency against six competitors, reached its lowest level since January 2 at 101.82 on Tuesday. The index lost more than two percent in August and is about to enter its second month in the red.
Markets are pricing in a 24.5 percent chance of a 50 basis point cut in September, compared to 50 percent a week ago. A 25 basis point cut is 75.5 percent, according to the CME FedWatch tool. Traders are pricing in a 93 basis point cut this year.
“The encouraging macroeconomic backdrop in the U.S., with solid domestic demand and moderate disinflation, suggests that the Fed is unlikely to cut interest rates as much as currently priced in,” said Elias Haddad, chief market strategist at Brown Brothers Harriman.
“There is therefore scope for an upward revision in expectations regarding the Fed’s key interest rate in favour of the US dollar and US Treasury yields.”
A narrow majority of economists surveyed by Reuters expect the US Federal Reserve to cut interest rates by 25 basis points at each of its remaining three meetings in 2024.
Investors’ attention will also be focused on the minutes of the last Fed meeting, which are due to be released on Wednesday.
The Australian dollar was down 0.12 percent at $0.6725, while the New Zealand dollar was little changed at $0.61135.
(Reporting by Ankur Banerjee in Singapore; Editing by Jamie Freed)
