The U.S. dollar dropped to a 2-and-a-half-month low against the euro and hit a 10-month trough versus the risk-sensitive Australian dollar on Tuesday. Traders firmly priced in a Federal Reserve interest rate cut this week, with more reductions expected in the coming months.
The greenback also slid to its weakest level in over two months against the British pound, after U.S. President Donald Trump repeated calls for aggressive monetary easing.
Markets now view a 25-basis-point Fed cut on Wednesday as certain, while some even see a chance of a larger 50-point move. In total, investors are betting on about 67 basis points of cuts by year-end, increasing to 81 basis points by the end of January.
The U.S. dollar index, which measures the greenback against six major peers, fell to 97.161, its lowest since July 24. Trump urged Fed Chair Jerome Powell in a social media post to deliver a “bigger” cut, pointing to housing market weakness.
Weak labor market data has been the main driver behind growing expectations of aggressive Fed action. This has weighed on the dollar and bond yields, while pushing Wall Street equities to fresh record highs on Monday.
Chris Weston, head of research at Pepperstone, said there is a growing view that “the Fed is behind the curve” and will likely cut rates not only in September, but also in October, December, and possibly January.
The euro climbed 0.23% to $1.1787, its strongest level since late July, ahead of German ZEW surveys and Italian inflation data. Sterling also gained 0.19% to $1.3624, the highest since July 8, with U.K. jobs data and the Bank of England’s policy decision in focus this week.
Meanwhile, the Australian dollar touched $0.6677, its strongest level since November 8, as Asian stocks followed Wall Street’s overnight rally. The dollar also eased 0.3% to 146.975 yen. The Bank of Japan meets Friday, and analysts widely expect no rate hike this time.
In Japan, the race for prime minister began heating up, with candidates including Farm Minister Shinjiro Koizumi and Chief Cabinet Secretary Yoshimasa Hayashi.
