Dollar Hovers Near Five-Week Lows as Fed's Powell Fuels Rate Cut Expectations

Dollar drifts: The US dollar remained close to five-week lows on Tuesday following comments from Federal Reserve Chair Jerome Powell, which strengthened the case for a rate cut in September. At the same time, cryptocurrencies gained amid increasing odds of former President Donald Trump getting reelected.

Powell remarked on Monday that three US inflation readings over the second quarter "add somewhat to confidence" that price increases are approaching the Fed's target sustainably.

"We've had three better readings, and if you average them, that's a pretty good place," Powell said at an Economic Club of Washington event.

These comments, likely Powell's last before the Fed's July 30-31 meeting, have shifted expectations toward rate cuts. Markets are now anticipating 68 basis points of easing this year, with a September rate cut fully priced in, according to the CME FedWatch tool.

The euro traded slightly lower at $1.0893, while sterling was at $1.2967. The dollar index, which measures the US currency against six major peers, stood at 104.3, near the one-month low of 104 touched on Monday.

"Despite dovish inclinations, Powell remained in a data-dependent mode, which is warranted after the Fed faced rising inflation in Q1 following a dovish pivot at the end of 2023," said Charu Chanana, head of currency strategy at Saxo.

"Markets may need to wait longer for confirmation of their September rate cut hopes, with growth and labour data, such as today's retail sales, on the radar."

US retail sales for June, due later today, are expected to show a 0.3 per cent month-on-month decline.

Meanwhile, the yen weakened in early trading after hitting a one-month high against the dollar at 157.165 per dollar on Monday. It last traded at 158.54, with traders cautious of further intervention from Japanese authorities.

Traders suspect Tokyo intervened in the market last week after the cooler-than-expected US inflation report, with Bank of Japan data suggesting authorities may have spent up to 3.57 trillion yen to support the yen.

Markets will be closely watching fresh money market data to see if Tokyo intervened on Friday as well.

In the cryptocurrency market, bitcoin rose 1% to trade just below $65,000, near its highest in a month. Ether also gained 1%, reaching a two-week peak of $3,466.

Cryptocurrencies and shares of companies potentially benefiting from a Donald Trump presidency surged on Monday after an assassination attempt on the Republican candidate increased expectations of his victory in the November election.

Trump has positioned himself as a cryptocurrency advocate during a San Francisco fundraiser in June, though he has not detailed his proposed crypto policy.

"While the crypto scene still has SEC Chair Gary Gensler as a regulatory consideration, potentially having the leader of the free world in your corner will always be favorable for crypto enthusiasts," said Chris Weston, head of research at Pepperstone.

Other currencies saw minor declines, with the Australian dollar down 0.16 per cent at $0.6749, moving away from the six-month high it reached last week. The New Zealand dollar eased 0.17 per cent to $0.6064, hitting a two-week low.