Aussie leads recovery as hopes for accommodative Fed knock the dollar

LONDON: The Australian dollar hit a two-week high and led a recovery against the U.S. currency on Monday as caution about the U.S. economy and expectations for an accommodative Federal Reserve meeting this week kept the greenback on the back foot.

The euro was also a beneficiary from the weaker dollar, adding 0.2 percent to $1.1352 as broader markets started the week in a bullish mood, with investors bidding equities higher.

Markets are expecting the Fed to strike a dovish tone when it meets this week, and bets for an interest rate cut have risen after weaker-than-expected manufacturing data on Friday. U.S. bond yields fell to 10-week lows.

The U.S. currency, measured against a basket of rivals, fell 0.1 percent to 96.440, hovering just above a two-week low.

The Aussie was the biggest gainer from the greenback's pullback. The Australian currency added as much as 0.5 percent to $0.7119, a two-week high, before settling at $0.7104.

The New Zealand and Canadian dollar also gained.

"The market is probably expecting some down-shift in the 'dot plots' (which currently see two hikes in 2019 and one in 2020), plus some more discussion on the end of quantitative tightening - i.e. stopping its balance sheet reduction. This should maintain a positive environment for risk," ING analysts said in a note to clients.

"While we do think the dollar can hold its own against the low-yielders ... the current low volatility environment plus decreasing headwinds should be positive for high yield and EM FX in general."

The Japanese yen was little moved at 111.52 yen per dollar.

Sterling slipped to $1.3243 - away from last week's nine-month high of $1.3380 - as some British lawmakers cast doubt on Prime Minister Theresa May's chances of winning a third attempt at gaining parliamentary approval for her Brexit withdrawal deal.

May is trying to convince lawmakers to back her deal in a possible vote in the British parliament this week, although two government ministers said on Sunday there might not be a vote unless they can be sure of getting the deal approved.

Commerzbank's Ulrich Leuchtmann said a vote on Tuesday "would constitute a signal that she considers it possible that her deal will be accepted.

"Admittedly, her views were wrong so often in the past that that would not necessarily constitute a strong GBP positive signal, but it should no doubt have a moderately positive effect on the British currency."