Dollar hovers near 3-1/2-year low as traders wager on US rate cut

By Ankur Banerjee

SINGAPORE (Reuters) -The U.S dollar wobbled on Friday, hovering near its lowest level in 3-1/2 years against the euro and sterling, as traders wagered on deeper U.S. rate cuts while awaiting trade deals ahead of a July deadline for President Donald Trump's tariffs.

With the geopolitical tremors of the Israel-Iran conflict in the rear view after a ceasefire that appeared to be holding, market focus this week has been on U.S. monetary policy.

The prospect of Trump announcing the next Federal Reserve chair, expected to be more dovish, earlier than usual to undermine the current Chair Jerome Powell has raised the odds of the central bank cutting rates.

Powell, whose term ends in May, was also interpreted as being more dovish this week in testimony to U.S. Congress, adding to expectations of more rate cuts. Traders are now pricing in 64 basis points (bps) of easing this year versus 46 bps expected on Friday.

"The sooner a replacement is announced for Powell, the sooner he could be perceived to be a ‘lame duck'," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

Trump has not decided on a replacement for Powell and a decision is not imminent, a person familiar with the White House's deliberations told Reuters on Thursday.

"For now, expectations President Trump will choose a more dovish chair will keep downward pressure on FOMC pricing and the USD," CBA's Kong said.

Trump has repeatedly attacked Powell and called for rate cuts this year, stoking investor worries about the slow erosion of U.S. central bank's independence and credibility.

The euro eased to $1.16885 after hitting $1.1745 in the previous session, its highest since September 2021. Sterling last fetched $1.3725, just below the October 2021 top of $1.37701 touched on Thursday.

The dollar index, which measures the U.S. unit versus six other currencies, was lingering near its lowest since March 2022 at 97.398, on course for a 2% decline in June, its sixth straight month in the red.

The index has dropped more than 10% this year as Trump's tariffs stoke U.S. growth worries, leading investors to look for alternatives.

The yen was slightly weaker at 144.56 a dollar, while the Swiss franc was last at 0.8013 a dollar, perched near its strongest level in a decade.

TARIFF DEADLINE LOOMS

Investor are also looking for signs of progress on new trade deals ahead of the July 9 deadline for Trump's "reciprocal" tariffs as nations scramble to get an agreement over the line.

German Chancellor Friedrich Merz said on Thursday the EU should do a "quick and simple" trade deal with the United States rather than a "slow and complicated" one.

A White House official said the U.S. has reached an agreement with China on how to expedite rare earths shipments to the United States.

The U.S. dollar's weakness pushed the Australian dollar, often considered a risk proxy, to a seven-month high of $0.6564 on Thursday. It last fetched $0.65435 on Friday and was set for a 1.6% gain for the week, its strongest week since early April.

Emerging market currencies also got a lift from the beaten-down U.S. dollar, with the Taiwan dollar surging to its strongest level since April 2022.

"Everyone is selling U.S. dollars - foreign investors are selling, and exporters are selling too," a Taiwan based trader told Reuters. "Even now, we have big clients who sold their U.S. dollar positions early this morning."

The next key event for markets will be the release of the core PCE price index in the U.S. on Friday, which could offer additional clues on the Fed's rate trajectory.

"A softer print can potentially reinforce recent dovish Fed rhetoric and further dovish repricing cannot be ruled out," said Christopher Wong, currency strategist at OCBC. "This should also add to broad USD weakness."

(Reporting by Ankur Banerjee in Singapore; Additional reporting by Liang-sa Loh and Faith Hung in Taipei; Editing by Jamie Freed, Christopher Cushing and Rachna Uppal)