Currencies

Dollar slips ahead of Fed rate decision

Background of U.S. dollar bills.
Alena Vikhareva | iStock | Getty Images

The dollar fell on Tuesday in choppy range-bound trading on the eve of an expected U.S. interest rate cut from the Federal Reserve, with markets anxious about an overnight spike in dollar funding costs.

The overnight rate, or the cost for banks and Wall Street dealers to borrow dollars, surged to 10% on Tuesday, the highest since at least January 2003, according to Refinitiv data. Analysts attributed quarterly corporate tax payments and settlement of $78 billion in Treasuries supply for the spike on Monday in interest rates in the repurchase agreement (repo) market.

"This morning's funding squeeze has put some upward pressure earlier in the dollar, but that is not likely to be a longer-term driver," said Erik Nelson, currency strategist, at Wells Fargo Securities in New York.

He added that the reaction in the FX market after key events is not always cut and dry. "We also have the Fed tomorrow and market participants are marking time ahead of the decision. So it's pretty much back and forth right now," Nelson said.

Though investors expect a 25 basis points rate cut, some believe this may be the last rate cut for a while absent more evidence of a U.S. economic slowdown. Money markets are pricing in about an 80% probability of another rate cut by year end.

"If the Fed does cut 25 bps, then we think it will be the last time until we really do see signs of recession," Brown Brothers Harriman strategists said in a note.

Against a basket of its rivals, the greenback edged 0.3% lower to 98.27.

Geopolitical tensions on Monday supported the dollar against some currencies after weekend attacks on a Saudi Arabian oil field. The yen, also a safe haven, also did well.

Though oil prices pulled back slightly from Monday's four-month highs, they remained about 15% higher than Friday's close on wariness that attacks on Saudi Arabian crude oil facilities could trigger a military response.

U.S. President Donald Trump said on Monday he did not want to go to war but also said Washington was still investigating if Iran was behind the strikes.

In other currencies, the euro was up 0.6% at $1.1065, catching a bid after an influential survey showed a brightening in German investor confidence.