The US dollar experienced a decline against major currencies on Tuesday, following gains from Monday, as the markets prepared for key inflation data and a highly anticipated US presidential debate. Despite these events, the overall impact on monetary policy is expected to be limited.
Safe-haven currencies, such as the yen and Swiss franc, strengthened amid a decline in bank stocks. This drop came after the Federal Reserve’s regulatory chief unveiled plans to raise capital requirements for major banks by 9%, which disappointed investors and critics. The S&P 500 banks index fell by 2.7%, reaching a one-month low.
The Federal Reserve is anticipated to cut interest rates next week for the first time in over four years. However, the exact magnitude of the cut remains debated. Fed funds futures indicate a 67% chance of a 25 basis point reduction and a 33% probability of a 50 basis point cut at the upcoming September 17-18 policy meeting. Expectations for a 50 basis point cut had surged to 50% last Friday following a mixed US labor report.
Eugene Epstein from Moneycorp noted that the dollar index is currently consolidating, reflecting a range-bound trend since late August. The market had high expectations for a Fed rate cut, but these have moderated recently.
Investors are also awaiting the US consumer price index (CPI) report for August, scheduled for release on Wednesday. The Federal Reserve has indicated a focus on employment rather than inflation, expressing confidence in a downward trajectory for inflation. The CPI is expected to have risen 0.2% month-on-month in August, unchanged from the previous month, and increased by 2.6% year-on-year, down from 2.9% in July.
In afternoon trading, the dollar fell 0.5% against the yen to 142.35 yen, nearing a one-month low. The greenback had fallen 2.7% against the yen last week. Analysts do not foresee the Bank of Japan making significant rate changes or providing new guidance in its upcoming meeting.
Against the Swiss franc, the dollar declined 0.3% to 0.8466 franc. The drop in oil prices also contributed to global uncertainty, boosting the yen and Swiss franc. Brent crude futures settled at their lowest since December 2021, influenced by OPEC+ revising down its demand forecast.
The euro slipped 0.1% to $1.1024, with investors observing political instability in Europe and awaiting the European Central Bank’s policy meeting on Thursday, where traders are pricing in 63 basis points of easing for the year.
The dollar index, which measures the greenback’s value against six major currencies, was flat to slightly lower at 101.63. Year-to-date, the index has risen by 0.1%.
Attention will also be on the US presidential debate between Republican nominee Donald Trump and Democratic Vice President Kamala Harris, which could influence market sentiment ahead of the November election. Investors anticipate a rise in the dollar if Trump wins, due to potential tariffs and increased fiscal spending that could drive interest rates higher.
The British pound saw a modest rise after UK employment data showed robust growth, trading up 0.1% at $1.3081.
In China, disappointing import data and lower-than-expected inflation highlighted weak domestic demand. The yuan eased slightly against the dollar, which rose 0.1% to 7.1193, although losses were moderated by better-than-expected export figures.
