LDN - Business

Dollar eases off two-month high as bets on big Fed rate cut fade

[July 31, 2019] By Sujata Rao

LONDON (Reuters) - The dollar hovered just off two-month highs on Wednesday as robust U.S. 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.

The Federal Reserve is expected at 1800 GMT to announce its first rate cut since 2008 and 78% 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 <.DXY> 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 and the Bank of Japan will also ease policy. Even after a one percentage point drop in the Fed funds rate - a 2.25%-2.50% range - U.S. rates will remain well above most G10 peers, analysts note.

Conviction 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.

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An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham/File Photo

Inflation also slowed in July, with core inflation, the measure closely watched by the ECB, at 1.1% year-on-year. It follows a slump in Germany to the lowest since November 2016.

"Given the absence of an uptrend in core inflation, weak GDP growth and the growth risks firmly pointing to the downside, the ECB looks likely to announce an entire package of stimulus measures at the September meeting," Nordea analysts said.

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% lower at $1.1145, having hit two-year lows last week around $1.110 <EUR=EBS>.

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.

The pound, which has tumbled this week as investors rushed to factor in the growing possibility of Britain leaving the European Union without transition trade arrangements in place, firmed 0.2% to $1.2167 <GBP=D3>, crawling back from a 28-month trough of $1.2120 plumbed on Tuesday.

(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by Angus MacSwan and John Stonestreet)

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