Dollar eases off 2-month high as big rate cut hopes fade

London

THE dollar hovered just off two-month highs on Wednesday as robust US data all but eliminated chances the Fed will deliver a half-point interest rate cut, while the euro remained near two-year lows on weak inflation and growth readings.

Ahead of the expected Federal Reserve rate cut, its first since 2008, 78 per cent of traders now price a 25 basis point cut, with the likelihood of a deeper easing diminishing as data, including second-quarter economic growth and consumer confidence, has beaten forecasts.

The focus will instead be on whether the Fed leaves the door open for further easing to insulate the economy from slowing global growth and fallout from trade conflicts.

Markets are pricing three cuts by year-end, the CME's Fedwatch tool shows. "A 50 bps cut would provide reason for bigger swings but we see little chance of that. With President Trump yesterday demanding a larger cut in a tweet, we have a very compelling reason for the Fed to deliver just 25bps," analysts at MUFG told clients, referring to the Fed's need to show it will resist White House pressure for major easing.

While the dollar is unlikely to weaken after the cut, any mention from Fed chairman Jerome Powell of global downside risks means "scope for dollar strength should be limited", they added.

By 1000 GMT, the dollar index was flat around 98.08 after pulling back from a two-month high of 98.206 touched on Tuesday. It is however set for its biggest monthly gain since October and is up for the ninth straight day.

The dollar remains supported, moreover, from expectations the European Central Bank (ECB) and the Bank of Japan (BOJ) will also ease policy. Even after a one percentage point drop in the Fed funds rate - a 2.25-2.50 per cent range - US rates will remain well above most G10 peers, analysts note.

Conviction that the ECB will cut rates and resume money-printing stimulus was strengthened after data showed economic growth in the euro zone halved in the second quarter.

The ECB will implement a 10bp cut in the deposit rate, start asset purchases at a pace of 30 billion euros monthly, plus offer strengthened forward guidance, they predicted.

The euro did not react to the data but stayed around 0.1 per cent lower at US$1.1145, having hit two-year lows last week around US$1.110.

The yen stood just off three-week lows to the dollar after the BOJ refrained from expanding stimulus, though it committed itself to doing so "without hesitation" if required. REUTERS