The U.S. dollar remained broadly firm on Tuesday as investors awaited further clarity on when the Federal Reserve might begin cutting interest rates. Market activity was muted, with many Asian markets closed for the Lunar New Year holiday and U.S. markets closed for President's Day.
Currency moves were influenced by expectations that the Fed will provide hints later in the week - notably through the minutes from its January meeting and advance U.S. GDP data - about the pace and timing of policy easing.
The yen trimmed losses following a fresh set of disappointing economic figures from Japan that bolstered speculation of additional government stimulus. Losses in the Australian dollar followed the release of the Reserve Bank of Australias minutes from its February meeting, which highlighted policymakers concerns around inflation and employment risks.
Kristina Clifton, senior currency strategist at Commonwealth Bank of Australia in Sydney, said: "Were quite positive on the U.S. economy. The market is currently pricing a high chance of a June interest rate cut, which is also our view. However, we differ from the market in that we expect a follow-up cut in July."
She added: "We judge that the most important driver of the dollar through 2026 will be the narrative of U.S. exceptionalism."
Key exchange rates were little changed on the session. The dollar index, which tracks the greenback against a basket of currencies, stood at 97.12 after gaining 0.2% in the previous session. The euro was down 0.06% at $1.1843, while sterling slipped 0.07% to $1.3616. The yen strengthened 0.15% to 153.28 per dollar.
Recent U.S. inflation data showed consumer prices rose by less than expected in January, creating more scope for the Fed to ease policy later this year. Money market traders have priced in 62 basis points of easing for the remainder of the year - a profile that equates to two quarter-point cuts and roughly a 50% probability of a third cut.
Markets currently see the next cut as most likely in June, assigning about an 80% chance to a 25-basis-point reduction, and traders will be parsing the Federal Open Market Committee's January meeting minutes when they are released on Wednesday for confirmation or contrast.
Other economic events on the calendar this week include inflation readings for Britain, Canada and Japan, and preliminary global business activity readings due on Friday. These data points will add context to central bank policy decisions and investor expectations heading into the spring.
Japans latest official figures showed the economy barely grew last quarter, recording a 0.2% annualised expansion. That outcome interrupted a recent rally in the yen and strengthened forecasts that the government could step up stimulus measures to support demand.
In the Antipodes, the Australian dollar eased 0.07% against the greenback to $0.7064 after the RBAs meeting minutes signalled concern. Australias central bank said inflation would likely have remained stubbornly high if it had not raised rates as it did this month, and it remained uncertain whether further hikes would be necessary.
Minutes from the RBAs board meeting noted that members were worried the risks to its inflation and employment mandates had "shifted materially." New Zealands currency also retreated, with the kiwi down 0.08% at $0.6026 as markets awaited Wednesdays Reserve Bank of New Zealand policy decision, where the bank is widely expected to keep rates on hold.
In cryptocurrencies, bitcoin ticked up 0.05% to $68,881.72, while ether was essentially unchanged at $1,999.11.
Market implications
- With the Fed minutes and U.S. GDP ahead, attention remains on the timing and scale of potential rate cuts - a key driver for currency and bond markets.
- Central bank communications from the RBA and RBNZ, together with weak Japanese growth data, are influencing risk-sensitive currencies in the Asia-Pacific region.
- Thin liquidity due to holidays can amplify intraday moves and complicate price discovery in foreign exchange and crypto markets.