By Investing.com – The U.S. dollar edged lower Tuesday, trading around its lowest levels this year, on growing bets the Federal Reserve will cut interest rates this week, potentially 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, traded 0.1% lower to 100.299.
Fed meeting starts
The U.S. central bank starts its latest policy-setting meeting later in the session, amid growing expectations that the Fed will cut interest rates by a hefty 50 basis points at the conclusion of a meeting on Wednesday.
Traders are pricing in a 68% chance for a 50 bps cut and a 32% chance for a 25 bps cut, CME Fedwatch showed.
“Markets have continued to consolidate their bearish dollar positions ahead of tomorrow’s FOMC announcement,” said analysts at ING, in a note. “This FX dynamics is a direct consequence of the steady dovish repricing in rate expectations, with the swap market now attaching around 70% implied probability (43bp) of a 50bp cut tomorrow.”
The economic data slate Tuesday includes the release of the latest U.S. retail sales numbers, which are forecast to have contracted month-on-month in August, potentially adding further weight to the idea of a 50 bps hike.
Euro could gain more in recession – BNP Paribas
In Europe, EUR/USD traded 0.1% higher to 1.1136, not far from the year’s high of 1.1201 despite the European Central Bank cutting interest rates by 25 bps last week.
The German 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 rally further against the dollar even if there is a global recession, according to analysts at BNP Paribas (OTC:BNPQY), in a note.
The French bank cites the dollar being used as a high-yielding currency, which has historically not been the case, as a reason, as this would mean the dollar is more vulnerable to fall as U.S. interest rates come down.
The Federal Reserve pushing rates further above their neutral level than many other central banks is another factor, while euro and peripheral government bond spreads in the currency bloc have become less sensitive to risk-off periods, a positive for the euro.
GBP/USD slipped marginally lower to 1.3213, even though sterling has been the best performing G10 currency this year with a 3.9% rise on the dollar.
The Bank of England meets on Thursday, and is expected to hold its key interest rate at 5%, after kicking off its easing with a 25-bp reduction in August.
Yen looks to BOJ meeting
The yen fell 0.1% against the dollar to 140.50, with the pair remaining close to its lowest levels for the year.
The yen was boosted by the prospect of lower U.S. interest rates, while traders were also seen building long positions in the yen before a Bank of Japan meeting this Friday.
Analysts do not expect the BOJ to hike interest rates. But policymakers are expected to present a hawkish front and forecast higher interest rates in the face of a pick-up in inflation.
USD/CNY traded largely unchanged at 7.0930, with local Chinese markets closed for a second straight session. But a swathe of weak economic readings from the country, released over the weekend, primed the yuan for more weakness.
