At 04:35 ET (08:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% lower to 100.357.
The U.S. central bank concludes its latest policy-setting meeting on Wednesday, and is widely expected to start cutting interest rates from the 5.25%-5.5% range that has been in place for the last 14 months.
A reduction in rates has been widely flagged by Fed officials, with the U.S. consumer price index falling last month to its lowest level since February 2021.
However, there remains a degree of uncertainty over the size of the cut, and the greenback fell sharply on Friday after media reports once again fueled speculation the Fed could deliver a hefty 50-basis-point interest rate cut.
Fed fund futures showed traders are pricing in a 59% chance of a 50-basis point cut at the September meeting, according to CME FedWatch.
U.S. Treasury yields have retreated again Monday in anticipation of a cut, with benchmark 10-year yields down 30 basis points in about two weeks.
The Fed’s rate decision will be followed by a post-meeting press conference during which Chairman Jerome Powell could provide hints about the further outlook for rates and the economy.
In Europe, EUR/USD traded 0.4% higher to 1.1115, with the single currency in demand despite the European Central Bank cutting interest rates by 25 bps last week.
ECB President Christine Lagarde dampened expectations for another reduction in borrowing costs next month, stating the rate path was not predetermined and that the central bank would decide rates meeting by meeting, with no pre-commitments.
ECB chief economist Philip Lane and Vice President Luis de Guindos speak at events on Monday.
GBP/USD climbed 0.4% to 1.3173, ahead of the latest Bank of England policy-setting meeting on Thursday.
The U.K. central bank is expected to hold its key interest rate at 5%, after kicking off its easing with a 25-bp reduction in August.
“Sterling continues to trade on the strong side. Dollar softness is the dominant theme and we have yet to have much bearish sterling news at all,” said analysts at ING, in a note.
The yen rose 0.8% against the dollar to 139.76, firming sharply to an over eight-month high, with a Bank of Japan meeting on tap later this week.
The Bank of Japan’s interest rate decision on Friday is expected to result in the short-term policy rate target remaining steady at 0.25%.
That said, BOJ board members have indicated they are keen to see rates higher, which would likely see the unwinding of more yen-funded carry trades.
USD/CNY traded largely unchanged at 7.0930, with regional trading volumes muted on account of market holidays in Japan, China, and South Korea.
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