The U.S. dollar fell to a two-month low on Tuesday as investors positioned ahead of the Federal Reserve’s upcoming policy decision and the release of August retail sales data.
By 04:25 ET (08:25 GMT), the Dollar Index, which measures the greenback against six major currencies, dipped 0.2% to 96.727, its weakest level since July.
Dollar begins week on “softish side”
Markets expect the Fed to lower interest rates by 25 basis points when it concludes its meeting on Wednesday, after recent reports showed ongoing softness in the U.S. labor market and inflation in August rising less than anticipated.
“The dollar has started the week on the softish side,” said analysts at ING. “This may partly involve some pre-positioning ahead of tomorrow night’s Fed rate cut. But it will also be a function of the benign external environment.”
According to CME FedWatch, traders see a 96.4% probability of a 25-basis-point cut and a 3.6% chance of a larger 50-point reduction. Investors are also keeping a close eye on retail sales, looking for indications of U.S. consumer strength amid the trade policy uncertainty created by the Trump administration.
“Today’s release of import price data will be closely examined to determine who is absorbing the cost of tariffs. Are exporters to the U.S. reducing their prices, or are U.S. businesses either absorbing the costs through margins or passing them on to consumers?” ING added.
Euro gains ground
EUR/USD rose 0.3% to 1.1794, ahead of German ZEW economic sentiment data for September.
“These might nudge higher on the back of the positive equity environment seen this summer, but look unlikely to be a market mover,” ING noted. “EUR/USD is pretty close to resistance at 1.1800/1830 now. The most likely trigger for a breakout would be tomorrow night’s Fed – but let’s see if it happens earlier.”
GBP/USD climbed 0.2% to 1.3630, reaching a two-month high against the dollar. Data released earlier showed U.K. unemployment remained at a near four-year peak of 4.7% in the three months to July, while wage growth, excluding bonuses, slowed to 4.8% in the three months to June.
The Bank of England is widely expected to hold rates steady on Thursday, following five cuts over the past year.
“We’re still narrowly favoring a November rate cut but a surprise spike in inflation tomorrow (one that’s not driven by volatile categories) would probably change our mind on that,” ING added.
Yen strengthens ahead of BOJ
USD/JPY fell 0.5% to 146.73 as the yen rebounded after a long weekend. The Bank of Japan meets on Friday and is expected to maintain rates near 0.5%, though persistent inflation could push for a hike as early as October, pending August consumer inflation data.
USD/CNY edged down 0.1% to 7.1147, buoyed by Beijing’s promise of additional stimulus measures, including “15-minute convenience living circles” to support domestic consumption. Weak economic prints for August underscore continued pressure on China’s economy, while ongoing U.S.-China trade talks, particularly on semiconductors, remain a market factor.
AUD/USD rose slightly, 0.1% to 0.6671, nearing a 10-month peak.
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