The U.S. dollar slid against major currencies on Tuesday, on some expectation that the Federal Reserve will signal a slower pace of tightening at its upcoming meeting to assess the impact of its rate hikes on the economy.
Investors widely expect the Fed this week to raise its benchmark overnight interest rate by 75 basis points to a range of 3.75% to 4.00%, the fourth such increase in a row.
But for December, the fed funds futures market has priced in a 57% probability of a 50 basis point increase amid suggestions from Fed officials of potentially slowing down the tightening pace. That was down, however, from roughly a 70% chance last Friday.
"There is some optimism that there could be a change in the language following the FOMC (Federal Open Market Committee) meeting this week that would suggest a deceleration could come for the next time," said Ivan Asensio, head of FX risk advisory at Silicon Valley Bank in San Francisco.
The Bank of England is also meeting this week and expected to deliver a 75-bps increase as well. Traders then expect the BoE to slow down and raise rates by 50 bps in December.
The dollar fell 0.3% to 148.21 yen.
The U.S. dollar index, which measures the greenback against six rivals, including the euro, sterling and yen, was near flat at 111.55, down from the 0.79% gain it made on Monday.
Sterling rose 0.1% to $1.1478 after dropping more than 1% on Monday. The euro lost 0.1% to $0.9875.
The dollar index has surged more than 15% this year as the Fed has hiked rates hard, crushing other currencies and heaping pressure on the global economy.
Investors have therefore taken cheer from speeches and interviews by some Fed officials that have suggested the central bank could do smaller hikes after Wednesday's meeting.
"Although the Fed may discuss downshifting at the December meeting, Powell will probably avoid pre-committing to such an action at this time," said Joseph Kalish, chief global macro strategist at Ned Davis Research.
"He will reiterate the Fed will be data dependent and will decide meeting by meeting."
Markets were also reminded that global inflation remains stubbornly high on Monday when data showed euro zone prices surged by the most on record in the year through October.
The risk-sensitive Australian and New Zealand dollars rose from one-week lows amid the broad lift in market sentiment. The Aussie was little changed at $0.64, while the Kiwi dollar rose 0.5% to $0.54.
The Aussie earlier fell after the Reserve Bank of Australia decided to stick with a slower quarter-point pace for rate hikes despite a surprise jump in inflation to a 32-year high in the third quarter.
In other currencies, the Chinese yuan fell to a near 15-year low against the dollar on Tuesday, before paring its losses after the central bank fixed the official guidance rate on the weaker side of the key 7.2 per dollar level for the first time since 2008. The dollar was last down 0.5% against the offshore yuan at 7.3033.