Investing.com – The U.S. dollar edged lower on Tuesday, trading around its lowest levels this year, on growing bets by the Federal Reserve to cut interest rates this week, potentially by a significant amount.
At 04:40 ET (08:40 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was trading 0.1% lower at 100.299.
Fed meeting begins
The U.S. central bank begins its final policy-setting meeting later in the session, with growing expectations that it will cut interest rates by 50 basis points at the end of Wednesday’s meeting.
Traders estimate a 68% chance of a 50 basis point cut and a 32% chance of a 25 basis point cut, according to the tool.
“Markets continued to consolidate their bearish positions on the dollar ahead of tomorrow’s FOMC announcement, ING (AS:) analysts said in a note. “This currency dynamic is a direct consequence of the continued repricing of rate expectations, with the swaps market now pricing in an implied 70% (43 basis points) probability of a 50 basis point cut tomorrow.
Tuesday’s economic slate includes the release of the latest U.S. data, which is expected to contract month-on-month in August, potentially reinforcing the case for a 50 basis point hike.
Euro could rise further in recession – BNP Paribas (EPA:)
In Europe, the euro traded up 0.1% at 1.1136, not far from the year’s high of 1.1201, despite the European Central Bank cutting interest rates by 25 basis points last week.
Germany’s ZEW economic sentiment survey is due later in the session, and is expected to show a slight deterioration this month as conditions in the euro zone’s largest economy remain difficult.
The euro could continue to recover against the dollar even in the event of a global recession, BNP Paribas analysts said in a note.
The French bank explains that the dollar is used as a high-yield currency, which has not been the case historically, because that would mean the dollar is more vulnerable to falling US interest rates.
The fact that the US Federal Reserve has pushed rates beyond their neutral level, more than many other central banks, is another factor, while spreads between the euro and peripheral government bonds in the currency bloc have become less sensitive to periods of risk-off, which is positive for the euro.
The pound edged lower to 1.3213, although sterling has been the best performing G10 currency this year, rising 3.9% against the dollar.
The site meets on Thursday and is expected to keep its key interest rate at 5%, after starting its easing with a 25 basis point cut in August.
Yen worries about BOJ meeting
The yen fell 0.1% against the dollar to 140.50, with the pair remaining close to its lowest levels of the year.
The yen was boosted by the prospect of a US interest rate cut, while traders also took long positions in the yen ahead of the meeting on Friday.
Analysts don’t expect the BOJ to raise interest rates. Analysts don’t expect the BOJ to raise interest rates, but policymakers are expected to present a hawkish front and anticipate higher interest rates if inflation picks up.
remained virtually unchanged at 7.0930. But a string of weak economic results from the country over the weekend set the yuan up for further weakness.
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