The U.S. dollar hovered near a four-year low against the euro and touched a one-month trough versus the yen on Wednesday. Traders are bracing for a widely expected interest rate cut by the Federal Reserve, which is set to announce its decision later in the session.
Markets have already priced in a 25 basis point cut. The focus now shifts to Jerome Powell’s comments, which investors will analyze closely for signals on the pace of further easing. Futures are currently pricing in almost 68 basis points of cuts by year-end.
Attention will also be on whether policymakers debated a larger 50 bps reduction, especially as President Donald Trump presses ahead with major economic reforms. His efforts have fueled concerns about the central bank’s independence.
In Asian trading hours, the currency market remained calm as traders avoided placing big bets before the Fed decision. The euro edged slightly lower to $1.1852, just under Tuesday’s four-year high of $1.18785.
Sterling held steady at $1.3642, close to its 2-1/2-month high. Weak British jobs data released Tuesday failed to shake market confidence that the Bank of England will keep rates unchanged this week.
The U.S. dollar index, which tracks the greenback against six major peers, stood at 96.686, hovering near its lowest level since early July. It is down almost 11% this year, and investors anticipate more weakness despite a recent pause in the decline.
Analysts warn the risk rally could be tested. “If Powell signals fewer cuts than the market expects, it may shake investor confidence,” said Laura Cooper, senior macro strategist at Nuveen. “With six cuts already priced in, the story isn’t about the size of the move this week but about how Powell outlines the path ahead.”
The Fed’s two-day meeting began Tuesday with new dynamics at the policymaker table. A federal appeals court recently blocked efforts to remove Fed Governor Lisa Cook, ensuring her participation in this week’s discussions.
Meanwhile, U.S. data showed retail sales rose more than expected in August, boosted by consumer spending on goods and dining. However, a weakening labor market and higher prices from tariffs remain risks to continued growth.
Elsewhere in the forex market, the Swiss franc eased slightly to 0.7869 per dollar, just off its decade high. The Australian dollar climbed to an 11-month high, trading at $0.6675. The Japanese yen strengthened to 146.22, its strongest in a month, before the Bank of Japan policy meeting on Friday. The BOJ is expected to hold rates steady.
Political uncertainty in Japan also looms large. On October 4, the Liberal Democratic Party will elect a new leader to replace outgoing Prime Minister Shigeru Ishiba. Analysts believe the BOJ is unlikely to act before the elections.
“Our base case is that the next rate hike could come in early 2026, as markets will want to see how new leadership unfolds,” said Howe Chung Wan, head of Asian fixed income at Principal Asset Management.
