US dollar nears a three-year low ahead of FOMC's rate decision

Bloomberg’s gauge of the US dollar approached its lowest level since March 2022 ahead of the Federal Reserve decision, where policymakers are expected to resume cutting interest rates to prop up a weakening labour market.

The Bloomberg Dollar Spot Index fell for a third day, dropping 0.1%, as traders await the central bank’s announcement and further guidance on the pace of rate reductions for the remainder of the year. The euro and yen helped lead major peers higher versus the greenback.

The Fed started its two-day meeting on Tuesday amid signs of a weakening job market and mounting pressure from US President Donald Trump to lower rates. Fed Chair Jerome Powell’s dovish speech last month at the Jackson Hole symposium has helped to boost expectations for rate cuts.

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“It seems every day markets are pricing in more rate cuts from the Fed,” said John Doyle at Monex. “Total 75 basis points by the end of the year is the new base case.”

US job growth cooled notably in August with the unemployment rate rising to the highest level since 2021, fanning concerns that the labour market may be on the cusp of a more significant deterioration. In addition, data released last week showed that US job growth was far less robust in the year through March than previously reported.

Swaps traders have fully priced in a quarter-point rate cut by the Fed later today, with a very small chance of half a point. Even stronger-than-expected retail sales released Tuesday failed to derail those bets — though it does suggest that a rate reduction is unlikely to exceed a quarter point. Market participants will also be watching the central bank’s dot plot, which shows how much more easing policy makers project in the months ahead.

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Hedge funds added to option trades on Tuesday, betting the dollar would weaken further in the coming months versus a range of currencies, including the euro, yen and Australian dollar, according to currency traders familiar with the transactions who asked not to be identified because they aren’t authorised to speak publicly.

The euro advanced to a four-year high on Tuesday as the European Central Bank is expected not to cut rates further, narrowing the gap between its key rate and the Fed’s. Meanwhile, the Swiss franc rose to the strongest level against the greenback since 2015.

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