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US dollar hovers near 3-week low, Aussie eyes RBA

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The dollar hovered near three-week lows on Tuesday after soft US economic data undermined the case for an early Federal Reserve rate hike while the Australian dollar braced for the probability of a policy easing later in the day.

[TOKYO] The US dollar hovered near three-week lows on Tuesday after soft US economic data undermined the case for an early Federal Reserve rate hike while the Australian dollar braced for the probability of a policy easing later in the day.

The US dollar index against a basket of six major currencies stood at 95.758, having fallen to as low as 95.384 last week when it posted its biggest fall in three months.

The index has struggled to stage a meaningful recovery since after the release of very weak US gross domestic product growth for the June quarter late last week.

Weaker-than-expected manufacturing data released on Monday continued to hold the greenback down. The influential Institute for Supply Management's (ISM) index of national factory activity dropped to 52.6 in July from 53.2 in June, below market expectations of 53.0.

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Fed funds futures are pricing in less than a 40 per cent chance of an interest rate hike by December.

Against the yen, the dollar changed hands at 102.40 yen, near its three-week low hit on Friday after the Bank of Japan disappointed markets with a less aggressive than expected easing.

Japanese Prime Minister Shinzo Abe is also due to formerly unveil his economic package on Tuesday, which is expected to include 7.5 trillion yen of fiscal spending, though this is not expected to affect the yen much.

"The size and rough contents of the package are already known so I doubt it will move markets. The dollar/yen is likely to fall unless there are clearer signs of a rate hike by the Fed," said Shinichiro Kadota, senior FX and rates strategist at Barclays Securities Japan.

The euro traded at US$1.1165, having moved little so far this week.

Meanwhile, the Australian dollar was on hold as traders looked to a policy announcement from the Reserve Bank of Australia at 0430 GMT, which is expected to cut interest rates to a new low.

Local interbank futures put the probability of a 25 basis point cut at around 60 per cent.

While expectations of a rate cut have dented the Aussie dollar, the currency remains relatively well-supported due in part to its still relatively high yield among its developed market peers.

The Aussie 10-year bonds yield stood just above 1.8 per cent, compared with 1.5 per cent for its US counterpart and below zero per cent in Japan and Germany.

REUTERS

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