On Tuesday, the dollar fell to its lowest point against the euro and the pound since March as signs of a slowing U.S. economy boosted expectations that the Federal Reserve would cut interest rates sooner.
After data showed that manufacturing activity slowed for two consecutive months and construction spending unexpectedly dropped, the dollar also hit its lowest point against the Swiss franc in two and a half months.
According to LSEG's interest rate probability application, after these data releases, the probability of a rate cut in September in the federal funds futures market increased to about 59.1%. By contrast, the probability was about 55% last Friday, when data showed consumer price pressures were stabilizing, leading to the dollar's first monthly decline this year in May. Earlier last week, this probability was slightly below 50%.
Friday's U.S. monthly job data will be a critical test.
"The Federal Reserve's ongoing high interest rate policy is under scrutiny as it continues to pressure the U.S. economy," Convera's senior corporate foreign exchange trader James Nefton wrote in a client note. "Analysts are closely watching the upcoming employment data for signs of economic pressure."
Currently, the market has fully priced in a 25 basis point hike at the Fed's November meeting, with an expected cumulative increase of 41 basis points by the end of the year.
"November will be a turbulent period for the U.S. dollar as the Fed's potentially decisive meeting and the U.S. elections will take place concurrently," Nefton said.
The Fed's next policy meeting will conclude on June 12, when consumer price data will also be released. Traders and analysts see little risk of policy changes at that meeting, but officials will update economic and interest rate forecasts.
The dollar index was largely unchanged at 104.08, having earlier fallen below 104, its lowest point since April 9.
The euro rose to $1.0916, its highest point since March 21.
The European Central Bank has hinted that policymakers will cut rates at Thursday's meeting, but last week's data showed inflation picking up, which might cause officials to hesitate when considering additional policy easing.
Ahead of the latest release of the local Consumer Price Index (CPI), the Swiss franc touched its strongest level since March 21 at 0.8947 dollars.
A month ago, data showed rising inflation pressures, reducing the chances of a rate cut by the Swiss National Bank this month to 50%. The bank was the first major central bank to begin an easing cycle in March.
"If today's CPI inflation rises again, it should cut expectations for consecutive rate cuts and see the Swiss franc test the 0.8930 resistance level," strategists at DBS Bank wrote in a report.
