Investing.com – The U.S. dollar fell on Tuesday, trading near its lowest level this year, on growing expectations that the Federal Reserve will cut interest rates this week, possibly by a large 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 US central bank will begin its latest policy-setting meeting later in the session, amid growing expectations that interest rates will be cut by a hefty 50 basis points at the end of a meeting on Wednesday.
Traders expect a 68% chance of a 50 bp cut and a 32% chance of a 25 bp cut, CME Fedwatch showed.
“Markets have continued to consolidate their bearish dollar positions ahead of tomorrow’s FOMC announcement,” ING analysts said in a note. “These currency dynamics are a direct result of the steady moderate repricing of interest rate expectations, with the swap market now expecting an implied probability of around 70% (43 basis points) of a 50 basis point cut tomorrow.”
Tuesday’s economic data includes the release of the latest US data, which is expected to have contracted month-on-month in August, potentially adding further weight to the idea of a 50 basis point increase.
The euro could gain more during a recession – BNP Paribas
In Europe, it traded 0.1% higher at 1.1136, not far from the year’s high of 1.1201, despite the European Central Bank cutting 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 eurozone’s largest economy remained challenging.
The euro could rise further against the dollar even if there is a global recession, BNP Paribas (OTC:) analysts wrote in a note.
The French bank cites the reason that the dollar is used as a high-yield currency, which has not been the case historically, as this would mean the dollar is more vulnerable to falling if US interest rates fall.
Another factor is that the Federal Reserve is pushing rates further above their neutral levels than many other central banks, while spreads on government bonds from the eurozone and peripheral countries in the currency bloc have become less sensitive to risk periods, which is positive for the euro .
fell marginally to 1.3213, even though sterling was the best performing G10 currency this year, up 3.9% against the dollar.
The ECB meets on Thursday and is expected to keep its key interest rate at 5% after beginning easing with a 25 basis point cut in August.
Yen watches the BOJ meeting
The yen fell 0.1% against the dollar to 140.50, with the pair remaining near the lowest level of the year.
The yen was boosted by the prospect of lower US yields, while traders also built up long positions in the yen ahead of a meeting next Friday.
Analysts do not expect the BOJ to raise interest rates. But policymakers are expected to take an aggressive stance and forecast higher interest rates in the face of a rebound in inflation.
traded largely unchanged at 7.0930, with local Chinese markets closed for a second straight session. But a slew of weak economic data from the country released this weekend set the yuan up for more weakness.
