Dollar extends fall ahead of Fed minutes, yen strengthens

A bank employee counts U.S. dollar notes at a Kasikornbank in Bangkok

By Chuck Mikolajczak

NEW YORK (Reuters) -The dollar index fell for a third straight session on Tuesday ahead of minutes from the U.S. Federal Reserve’s most recent policy meeting as expectations grow the central bank will start to cut rates in the early portion of next year.

The dollar has stumbled as recent data has showed a slowing of the economy and inflation pressures, including the consumer price index (CPI) data, but not enough to increase fears a sharp recession is looming, leading markets to price out any additional Fed rate hikes.

Investors are now attempting to determine when the Fed may begin to cut rates and are currently pricing in more than a 60% chance of a cut of at least 25 basis points by May, according to CME’s FedWatch Tool, up from about 58% on Monday.

“There definitely seems to be momentum behind it since the CPI report, this notion that the rate hikes are over,” said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull in Toronto.

“It’s been a momentum move, it’s been hard to step in the way of that.”

Bregar noted, however, the downward move in the greenback may be starting to run out of steam and big option expirations in the eurodollar and yen could stabilize the dollar.

The Fed minutes are expected to emphasize the word “careful,” which U.S. monetary policymakers have rallied around at a time when they seem unlikely to raise the target interest rate any further, yet don’t want to say so while inflation remains well above the central bank’s 2% target.

Recent comments from some Fed officials have not ruled out the possibility more rate hikes could be needed should a change in economic data require it.

Economic data showed U.S. existing home sales dropped to the lowest level in more than 13 years in October as the highest mortgage rates in two decades and a dearth of houses drove buyers from the market.

The dollar index fell 0.13% to 103.31 after falling to a fresh 2-1/2 month low of 103.17, its lowest since Aug. 31.

The weakness in the dollar has buoyed the yen, along with expectations the Bank of Japan may eventually start to move off its ultra-loose monetary policy next year.

The yen strengthened 0.42% versus the greenback to 147.76 per dollar after the greenback hit its lowest level since mid-September at 147.14 yen, while sterling was last trading at $1.254, up 0.29% on the day.

The euro was up 0.03% at $1.0941 after reaching 1.0964, its highest since Aug. 11.

(Reporting by Chuck Mikolajczak; Editing by Nick Macfie)