Kevin Buckland
TOKYO (Reuters) – The dollar fell to its weakest level since March against the euro and sterling on Tuesday as signs of a weakening U.S. economy strengthened the case for an earlier interest rate cut by the Federal Reserve.
The U.S. currency also fell to its lowest level in 2-1/2 months against the Swiss franc after data showed a second straight month of slowing manufacturing activity and an unexpected decline in construction spending.
Fed funds futures increased the odds of a September rate cut to about 59.1%, according to data from the LSEG application.
That compares with a chance of about 55% on Friday, when data showed pressure on consumer prices stabilizing, helping the dollar record its first monthly loss of the year in May. At the beginning of last week, rates were just below 50%.
The key test will be monthly US payroll data on Friday.
“The Federal Reserve’s ongoing policy of high interest rates is under scrutiny as it continues to weigh on the U.S. economy,” James Knightton, senior corporate FX dealer at Convera, wrote in a note to clients. “Analysts are closely monitoring upcoming employment data for signs of economic strain.”
The first quarter-point rate hike is currently fully scheduled for the November Fed meeting, with a 41 basis point tightening expected by the end of the year.
November “will be a turbulent period for the US dollar due to the combination of a potentially pivotal Federal Reserve meeting and the US election,” Knightton said.
The next Fed meeting will end on June 12, when consumer price data will also be published. Traders and analysts see no risk of policy changes at the meeting, but officials will update their economic and interest rate forecasts.
The index, which measures the currency against the euro, pound sterling, yen and two other major currencies, was little changed at 104.08 after earlier dipping below 104 for the first time since April 9.
The euro rose to $1.0916 for the first time since March 21.
The European Central Bank telegraphed that policymakers would cut rates at their meeting on Thursday, but rising inflation in data last week could leave officials wondering when they could cut them soon.
The Swiss franc hit its highest level since March 21 at 0.8947 per dollar ahead of the release of the latest local consumer price index (CPI) data.
Rising inflation pressures in data shown a month ago helped reduce the chances of a rate cut by the Swiss National Bank this month to a mere coin toss after it became the first major central bank to begin an easing cycle in March.
“Another rise in today’s CPI inflation should throw off expectations of a parallel rate cut” and see the franc resist at 0.8930, DBS strategists wrote in a note.
Sterling reached $1.2818, a level last seen on March 14.
However, the dollar added 0.24% to 156.39 yen, retreating from an overnight low of 155.95 to dip below 156 yen for the first time since May 21.
The Bank of England and the Bank of Japan will also hold potentially important policy meetings later this month, and traders will be watching for clues about when the former will start cutting rates and the latter will raise rates again.