LONDON: The euro hovered on Tuesday around the 26-month low it reached last week against the dollar as investors awaited to see whether the Federal Reserve would signal the start of an interest rate-cutting cycle.
Although the Fed is expected to lower rates in the United States when its two-day policy meeting ends on Wednesday, US yields will remain above those in the euro zone, making the dollar a more attractive investment for yield-seeking traders, analysts say.
Money markets are convinced the central bank will cut the key benchmark rate by 25 basis points to between 2% and 2.25% on Wednesday, but it remains to be seen whether this is going to be a one-off cut or whether more cuts will follow.
Analysts from Bank of America Merrill Lynch expect the Fed to guide on Wednesday towards more “insurance cuts” in the coming meetings, which essentially means taking preventive measures by cutting rates “in the face of high uncertainties and a cloudy outlook,” they said in a note to clients.
Nearly three cuts are priced in the money markets by the end of this year.
The euro was flat at $1.1144, unmoved by lower regional German inflation data and weaker euro area economic sentiment gauges, but not far from the low of $1.1101 it reached last week.
The consumer price index declined across most key regions in Germany in July. Traders are waiting for the preliminary harmonized German inflation data at 1200 GMT, which according to the economists polled by Reuters could show a fall in inflation to 1.5% in July from 1.6% in June, on a year by year basis.
So far this month, the common currency has shed nearly 2% against the greenback. Building expectations that the European Central Bank may turn out to be more aggressive than the Fed in easing monetary policy contributed to euro falls.
The pound was the biggest mover in the foreign exchange market, plunging to a new 28-month low of $1.2120 in Asian trading on growing concerns that Britain could crash out of the European Union without a transition agreement on Oct. 31.
Sterling was last down 0.3% at $1.2183. It was also weaker against the euro by 0.4% at 91.52 pence, having touched earlier a two-year low of 91.88 pence.
The Japanese yen was last up by 0.2% at 108.55 yen per dollar versus the dollar after the Bank of Japan as expected maintained on Tuesday a pledge to keep short-term interest rates at a negative 0.1% via aggressive bond purchases.
The BoJ also said it would ramp up stimulus “without hesitation” if needed, but traders have repeatedly said that compared with other major central banks the BoJ has limited options left.
Elsewhere, the Australian dollar reached a six-week high of $0.6887 against the US dollar, but otherwise the rest of the forex market was relatively quiet.
The Swiss franc has stabilised after its recent run to two-year highs and was last up 0.1% at 1.1038 versus the euro.