Dollar holds gains on Fed cut bets; RBA decision keeps Aussie in check

The US dollar held steady on Tuesday as investors braced for a critical inflation report that could shape expectations for Federal Reserve interest rate cuts next month. The Australian dollar also remained flat ahead of the Reserve Bank of Australia’s (RBA) closely watched policy decision. As per Reuters, the US dollar index, which tracks the greenback against six major currencies, including the euro and yen, was stable at 98.497 as of 0046 GMT, after gaining 0.5 per cent over the past two sessions. The rise followed earlier losses sparked by US President Donald Trump’s dovish-leaning pick to replace a Fed governor and similarly inclined potential candidates for chairman, which led traders to increase bets on monetary easing.

Fed rate cut speculation builds ahead of CPI release

Federal Reserve officials have signalled growing concerns over the US labour market, hinting at a possible interest rate cut as early as September. Market pricing reflects about an 89 per cent probability of a quarter-point reduction on September 17, according to Reuters data. Cooling inflation could strengthen the case for a cut, but analysts warn that any signs Trump’s tariffs are fuelling price pressures may keep the Fed on hold.

Economists polled by Reuters expect core US consumer price inflation to have risen 0.3 per cent in July, pushing the annual rate to 3 per cent. TD Securities strategists wrote in a research note that the “risk-reward heading into US CPI this week is for a modest USD bounce,” as an upside surprise could challenge expectations for an almost fully priced-in rate cut. They added that a downside miss would likely have less impact on the dollar, with a larger 50-basis-point cut more likely to be triggered by further labour market deterioration rather than soft CPI figures.

Currency market snapshot

On Tuesday, the greenback inched 0.1 per cent higher to 148.28 yen, while the euro was unchanged at $1.1615. The yuan traded flat at 7.1935 per dollar in offshore markets. According to Reuters, the dollar’s moves were largely unaffected by Trump’s Monday executive order extending a 90-day pause on sharply higher tariffs for Chinese imports, a decision widely anticipated by traders.

The US and China are working to finalise a deal that would avert triple-digit import duties. A US official told Reuters that American chipmakers Nvidia and AMD had agreed to allocate 15 per cent of their China sales revenues to the US government to secure export licences for semiconductors.

The Australian dollar traded at $0.6518; little changed from Monday’s levels. Economists widely expect the RBA to cut rates by a quarter point following weaker-than-expected second-quarter inflation data and a rise in unemployment to a three-and-a-half-year high.

However, as per Reuters, last month’s surprise hold has left traders cautious, with a recent shift in the central bank’s decision-making process adding uncertainty to the outcome.

In cryptocurrency markets, bitcoin was steady at around $118,845, after surging as high as $122,308.25 on Monday , close to its all-time high of $123,153.22 reached in mid-July.

(With inputs from the agencies)