The US Dollar was trading near its lowest levels of the year on Tuesday, ahead of the anticipated start of a US monetary easing cycle with markets speculating that this could kick off with a larger-than-expected interest rate cut.
The Euro stood at $1.1123 in Asian trading, not too far from the year high of $1.1201.
The Dollar index, measuring the currency against six peers, held at 100.7, not far from its year-low of 100.51 hit in August.
Whereas during holiday-thinned trading on Monday, the Japanese Yen rose to the stronger side of the 140-mark, yet dipped back to 140.77 by the time traders resumed activity in Tokyo.
The Yen has experienced the steepest decline this year, giving it the greatest potential to rally if the US central bank takes a dovish stance. A sustained drop below the 140.00 level could pave the way for a move toward the January low of 127.215, Reuters reports.
Fed funds futures have surged, increasing the probability of a 50-basis point rate cut to 67%, up from 30% just a week ago. This sharp shift in odds follows media reports that reignited expectations of a more aggressive easing by the Federal Reserve.
“Regardless of which of -25bps or -50bps the (Fed) goes with on Wednesday, we do think that the Fed's messaging will be 'dovish,'” according to Macquarie strategists in a note to clients.
“The USD could weaken against the majors on a very dovish tone, even with a -25bp cut … the largest losses, if any, are still likely to be experienced against the JPY,” they added.
“That's because the contrast between central bank outlooks will remain starkest between the Fed and the BOJ, for the time being.”
The Bank of Japan is expected to maintain its current policy at Friday's meeting but is likely to signal that further interest rate hikes are on the horizon. This could set the stage for the next meeting in October to be a pivotal one for potential action.
Elsewhere, Sterling, the top-performing G10 currency this year with a 3.9% gain against the greenback, has spearheaded the charge against the Dollar, due to the resilience of Britain’s economy and persistent inflation pressures.
The Pound rose above $1.32 on Monday and was trading at $1.3203 during the Asia session.
The Bank of England is widely anticipated to maintain its current interest rate of 5% at its meeting on Thursday. However, markets have factored in a 36% probability of a potential rate cut.