TOKYO- The dollar languished at its lowest since March against the euro and sterling on Tuesday as signs of a softening US economy boosted the case for earlier Federal Reserve interest rate cuts.
The US currency also slumped to its weakest in 2 1/2 months versus the Swiss franc after data showed a second straight month of slowdown in manufacturing activity and an unexpected decline in construction spending.
Following the data, fed funds futures increased the chances of a rate cut in September to around 59.1 percent , according to LSEG’s rate probability app.
That compares with odds of around 55 percent on Friday, when data showed a stabilization in consumer price pressures, helping knock the dollar to its first monthly loss of the year in May. Wagers were slightly below 50 percent earlier last week.
A key test comes in the form of monthly US payroll figures on Friday.
“The persistent high-interest-rate policy of the Federal Reserve is under scrutiny as it continues to weigh on the US economy,” James Kniveton, senior corporate FX dealer at Convera, wrote in a client note. “Analysts are closely monitoring the upcoming job data for indications of economic strain.”
Currently, a first quarter-point rate increase is fully priced by the Fed’s November meeting, with a total of 41 basis points of tightening seen by year-end.
November “is poised to be a tumultuous period for the US dollar due to the confluence of a potentially decisive Federal Reserve meeting and the US elections,” Kniveton said.
The Fed’s next policy meeting concludes on June 12, when consumer price data is also due.
Traders and analysts don’t see any risk of a policy change at that gathering, but officials will update their economic and interest-rate projections.
