The Australian Dollar approached a four-month low on Tuesday as the central bank adopted a more dovish stance on inflation, fuelling speculation of an earlier interest rate cut.

Meanwhile, the US Dollar held steady against major currencies, reaching its highest level this month against the Yen, with traders awaiting Wednesday's US inflation report for insights into the Federal Reserve's policy trajectory.

At the time of writing the Aussie dropped 0.68% to $0.63975, after briefly touching $0.6380, nearing Friday's low of $0.6373, its weakest level since 5th August. 

Similarly, the New Zealand Dollar fell 0.55% to $0.5833, mirroring the Aussie’s decline. 

The Reserve Bank of Australia (RBA) kept rates unchanged, as anticipated, but indicated it had gained “some confidence” that inflation was returning to its target range, Reuters reports.

The central bank’s statement omitted a prior remark that it was “not ruling anything in or out” regarding future policy moves, along with a reference to the necessity of maintaining restrictive policy settings.

“The RBA have just removed their hawkish bias, which is an important first step towards acknowledging cuts that markets are already pricing in for next year,” said Matt Simpson, a senior market analyst at City Index.

“The question now is whether they'll sneak in a cut in Q1.”

Market swaps now suggest a greater than 50% probability of a rate cut by February, with expectations for a first easing fully priced in by April 2024.

Meanwhile, the US Dollar dipped 0.1% to 151.075 Yen after earlier reaching 151.55 yen, its highest level since 28th November.

The Dollar index, measuring the greenback against six major peers, fell 0.1% to 106.05.

It had surged to a two-year high of 108.09 on 22nd November, buoyed by expectations that Donald Trump's election victory would boost US economic growth and inflation, potentially moderating the pace of Federal Reserve rate cuts. 

While markets see a quarter-point Fed rate cut on 18th December as nearly certain, Wednesday's consumer price index release could offer insights into how much leeway policymakers might have for additional easing in 2024.

“The case for 'US exceptionalism', and subsequent USD upside, remains a strong one,” stated Michael Brown, senior research strategist at Pepperstone.

“I'd still be a buyer of any USD dips.”

Elsewhere, the Euro edged up 0.12% to $1.0566, while the British Pound gained 0.09% to reach $1.27625.