Dollar near lowest levels this year on expectations of rate cut

The dollar approached its lowest level this year on Tuesday, ahead of the expected start of the U.S. monetary easing cycle, which market players are betting could start with a major interest rate cut.

The euro hovered around $1.1123 in Asian trading, remaining close to its highest level this year at $1.1201.

The yen rose to 140 against the dollar in thin trading due to a holiday on Monday, then retreated to 140.77 as traders returned to work in Tokyo.

According to the CME Group's FedWatch service, Fed funds futures rose to 67 percent, increasing the probability of a 50 basis point rate cut to 30 percent a week ago.

Regardless of whether the Fed cuts rates by 25 or 50 basis points on Wednesday, we believe the Fed's decision will be monetary easing, Macquarie analysts said in a note to clients.

Analysts added that the dollar will fall against major currencies if there is talk of significant monetary easing, even with a 25 basis point rate cut... The biggest losses, if they occur, will likely be against the yen.

They attributed this to the fact that the divergence between central bank expectations will remain most pronounced between the Federal Reserve and the Bank of Japan at the present time.

The Bank of Japan is expected to stick to its policy on Friday but has signaled interest rate hikes again.

The pound, the best performing G10 currency this year with a 3.9 percent rise against the dollar, led the rally against the greenback on evidence of a robust British economy and steady inflation.

The pound broke above $1.32 on Monday and was at $1.3203 in Asian trade. The Bank of England is expected to leave interest rates unchanged at 5 percent at its meeting on Thursday.

The Australian dollar rose $0.6746 and the New Zealand dollar rose $0.6189 on Tuesday.

Chinese markets are closed until Wednesday for a holiday, but the yuan rose to 7.0947 against the dollar in offshore trading.

The dollar index held steady at 100.7, remaining close to its 2024 low of 100.51 hit last month.

U.S. retail sales data and Canadian CPI data are due later in the session, but all eyes remain on the Federal Reserve's two-day meeting that ends on Wednesday.