Dollar lingers near 3-1/2-year low as traders wager on US rate cuts
SINGAPORE - The dollar drifted on Friday, hovering near its lowest level in 3-1/2 years against the euro and sterling, as traders wagered on deeper U.S. rate cuts while awaiting trade deals ahead of a July deadline for President Donald Trump's tariffs.
With the geopolitical tremors of Israel-Iran conflict in the rear view after a ceasefire that appeared to be holding, market focus this week has been on U.S. monetary policy.
The prospect of Trump announcing the next Federal Reserve chair, who is expected to be more dovish, earlier than usual to undermine the current chair Jerome Powell has raised odds of the central bank cutting rates.
Powell, whose term ends in May, was also interpreted as being more dovish this week in testimony to U.S. Congress, adding to expectation of more rate cuts. Traders are now pricing in 64 basis points of easing this year versus 46 bps expected on Friday.
"The sooner a replacement is announced for Powell, the sooner he could be perceived to be a 'lame duck'," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
The Wall Street Journal reported on Wednesday that Trump has toyed with the idea of selecting and announcing Powell's replacement by September or October, a move analysts say could lead to the person operating as a shadow Fed chair, undermining Powell's influence.
Trump has not decided on a replacement for Powell and a decision is not imminent, a person familiar with the White House's deliberations told Reuters on Thursday.
"Such an outcome could introduce some volatility into financial markets if the nominee makes public comments markedly different to the current chair," CBA's Kong said.
"For now, expectations President Trump will choose a more dovish chair will keep downward pressure on FOMC pricing and the USD."
Trump has repeatedly attacked Powell and called for rate cuts this year, stoking investor worries about the slow erosion of U.S. central bank's independence and credibility.
The euro was steady at $1.1693 in early trading after hitting $1.1745 in the previous session, its highest since September 2021. Sterling last fetched $1.3733, just below the October 2021 top of $1.37701 touched on Thursday.
The dollar index, which measures the U.S. unit versus six other currencies, was lingering near its lowest since March 2022 at 97.378, on course for a 2% decline in June, its sixth straight month in the red.
The index has dropped more than 10% this year as Trump's tariffs stoke U.S. growth worries, leading investors to look for alternatives.
The yen was a bit weaker at 144.73 per dollar, while the Swiss franc was last at 0.8013 per dollar, perched near its strongest level in a decade.
Investor attention will also be on progress on trade deals ahead of the July 9 deadline for Trump's "reciprocal" tariffs as nations scramble to get an agreement over the line with the clock ticking.
German Chancellor Friedrich Merz said on Thursday the EU should do a "quick and simple" trade deal with the United States rather than a "slow and complicated" one.
A White House official said on Thursday the U.S. has reached an agreement with China on how to expedite rare earths shipments to the United States.
The dollar's weakness pushed the Australian dollar often considered a risk proxy, to a seven-month high of $0.6564 on Thursday. It last fetched $0.6559 in Asia mid-morning on Friday. The Aussie is set for a 1.6% gain for the week, its strongest week since early April.
Emerging market currencies also got a lift from the beaten-down dollar, with the Taiwan dollar surging to its strongest level since April 2022.
Traders in Taiwan said the local currency's rise was being driven by expectations of interest rate cuts in the United States, the general global weakness of the greenback and the continued flood of foreign capital into the island.
"These trends can't be stopped - the direction coming from the Americans is very clear," said one Taiwan-based market participant.
(Reporting by Ankur Banerjee in Singapore; Additional reporting by Liang-sa Loh in Taipei; Editing by Jamie Freed and Christopher Cushing)
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