U.S. Dollar Slips to Near Seven-Month Lows Amid Rate Cut Speculation

The U.S. dollar continued its downward trend on Tuesday, edging closer to seven-month lows as growing expectations of a Federal Reserve interest rate cut in September weighed on the currency.

As of 04:00 ET (09:00 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, fell by 0.3% to 101.667. This marked one of its lowest levels since early January.

Dollar Weakens on Fed Rate Cut Optimism

Over the past month, the U.S. dollar has declined by more than 2%, mirroring a similar drop in U.S. Treasury yields. This trend reflects increasing optimism that the Federal Reserve will move to cut interest rates next month.

Federal Reserve Chair Jerome Powell’s upcoming speech at the Jackson Hole symposium on Friday is eagerly awaited by traders, who are hoping for more definitive signals on the timing and extent of the anticipated rate cuts. However, analysts at Evercore ISI have cautioned that Powell may not provide a “hard steer” on whether the initial rate cut will be 25 or 50 basis points. Instead, the Fed Chair is expected to emphasize that the decision will depend on forthcoming labor market data.

The Fed has kept its benchmark overnight interest rate in the 5.25%-5.50% range since last July. Traders are now fully pricing in a 25-basis-point rate cut in September, with a 24.5% chance of a more aggressive 50-basis-point reduction.

Euro Hits Yearly Highs Against the Dollar

In Europe, the euro continued to benefit from dollar weakness. The EUR/USD pair traded largely unchanged at 1.1086, maintaining its highest level of the year. The euro has appreciated by approximately 2% this month, poised for its strongest monthly performance since November.

The eurozone’s consumer price index was confirmed to be flat on the month in July, with an annual gain of 2.6%, indicating that inflationary pressures remain subdued across the region.

Meanwhile, the British pound also gained ground, with GBP/USD rising 0.2% to 1.3009, reaching a one-month high. The sterling has similarly benefited from the dollar’s decline.

Traders are currently divided on the likelihood of another rate cut by the Bank of England in the coming month, following its recent decision to begin a rate-cutting campaign in a closely contested vote.

Yen Stable Ahead of BOJ Governor Ueda’s Speech

In Asia, the USD/JPY pair dipped slightly by 0.1% to 146.35, remaining close to the near two-week high reached in the previous session. However, it is still well above the seven-month low of 141.67 recorded in early August.

Investor focus is now shifting to Bank of Japan Governor Kazuo Ueda, who is scheduled to address parliament on Friday. Ueda is expected to discuss the central bank’s recent decision to raise interest rates, with market participants keen to see if he will maintain his hawkish stance.

Elsewhere, the USD/CNY pair traded flat at 7.1395, with little reaction to the People’s Bank of China keeping its benchmark loan prime rate unchanged, as expected. The decision to hold rates follows the PBOC’s unexpected rate cut in July, which was aimed at bolstering economic growth.

As global markets remain sensitive to central bank actions, the upcoming speeches and data releases will likely play a pivotal role in determining the future direction of the U.S. dollar and other major currencies.