The dollar traded near its lowest levels of the year on Tuesday, on the eve of the expected the start to a U.S. easing cycle that markets are betting may begin with an outsized rate cut.
The euro rallied overnight to $1.1138 and traded around there early in the Asia session, not far from the year's high against the dollar of $1.1201.
The yen made a jaunt to the stronger side of 140 during holiday thinned trade on Monday, and had eased back to 140.96 as dealers returned to their desks in Tokyo.
It has fallen the most this year so has the most room to rally on a dovish turn from the U.S. central bank.
A sustained break of 140.00 would open the way to a low from last January at 127.215.
Fed funds futures rallied on Monday to push the chance of a 50 basis point rate cut to 67%, against 30% a week ago. The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing.
"Regardless of which of -25bps or -50bps the (Fed) goes with on Wednesday, we do think that the Fed's messaging will be 'dovish,'" said Macquarie strategist 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 said.
"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 keep policy steady on Friday but signal that further interest rate hikes are coming, perhaps turning the next meeting in October into a live one.
Sterling – the best performing G10 currency this year with a 3.9% rise on the dollar – has also led the charge against the dollar thanks to signs of resilience in Britain's economy and stickiness in inflation.
It broke above $1.32 on Monday and bought $1.3209 early in the Asia session. The Bank of England is generally expected to leave rates on hold at 5% when it meets on Thursday, though markets have priced in a 36% chance of another cut.
The Australian and New Zealand dollars also rallied through Monday and bought $0.6750 and $0.6192 respectively on Tuesday, as traders focused more on the Fed rather than weekend signs of deepening trouble in China's sluggish economy.
Chinese markets are closed for the mid-autumn festival break until Wednesday, though the yuan was firm at 7.1000 in offshore trade as it settles in to a new range.
The U.S. dollar index weakened 0.4% overnight to 100.7, not far from its 2024 low made last month at 100.51.
U.S. retail sales data and Canadian CPI figures are due later in the session, though all eyes are on the Fed's meeting on Wednesday.
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