US dollar strengthens ahead of expected Fed rate cut

By Chibuike Oguh

NEW YORK (Reuters) -The U.S. dollar strengthened against most major currencies on Tuesday following better-than-expected retail sales data that seemed to support a less aggressive stance by the Federal Reserve, which is widely expected to deliver its first interest rate cut in more than four years.

Commerce Department data showed on Tuesday that U.S. retail sales unexpectedly rose 0.1% in August, suggesting that the economy remained on solid footing through much of the third quarter.

The Fed's Federal Open Market Committee will give its interest rate decision at the conclusion of its meeting on Wednesday after which Chair Jerome Powell will hold a press conference. The last Fed rate cut was in March 2020 during the COVID-19 pandemic.

"I think like all the markets at this point are hostage to this FOMC meeting tomorrow," said Marvin Loh, senior global market strategist at State Street in Boston.

"Retail sales were okay. It certainly doesn't show that there should be an imminent rush to have supersized cuts and it would be somewhat unprecedented for the Fed to really panic in rate cuts given where the market is at this point."

Against the yen, the dollar rose 0.87% to 141.830 after initially weakening following the retail sales data.

The euro was down 0.10% to $1.112125, not far from the year's high of $1.1201. Against the Swiss franc, the dollar was up 0.15% to 0.8460.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, gained 0.199% at 100.90.

Fed funds futures show the chance of a 50 basis point rate cut stood at 63%, against 30% a week ago, while the chances of a 25 basis point cut was at 37%. The odds have narrowed sharply after media reports revived the prospect of a more aggressive easing.

Other economic data on Wednesday appeared to provide support for the Fed to be less aggressive in cutting rates. U.S. business inventories, a key component of gross domestic product, posted a better-than-expected gain of 0.3% in July while factory output rebounded in August.

"Overall, the market is pricing in numerous rate cuts over the next several months and there are those voices that suggest that maybe the market has gotten ahead of itself," said Axel Merk, president and chief investment officer at Merk Investments in Pal Alto, California.

The Bank of Japan is expected to keep policy steady on Friday but signal that further interest rate hikes are coming, perhaps turning the next meeting in October into a live one.

The Bank of England is also expected to retain interest rates at 5% when it meets on Thursday, although markets have priced in a nearly 36% chance of another cut.

Sterling - the best performing G10 currency this year with a 3.41% rise on the dollar - has risen thanks to signs of resilience in Britain's economy and stickiness in inflation. It was last down 0.37% at $1.31665.

Chinese markets are closed for the Mid-Autumn Festival break until Wednesday, though the yuan was up 0.16% at 7.1090 in offshore trade.

The Canadian dollar was up 0.04% at $1.35935. The Australian and New Zealand dollars bought $0.67595 and $0.61900 respectively.

In cryptocurrencies, bitcoin gained 5.00% to $60,544.00. Ethereum rose 3.29% to $2,349.00.

Currency bid prices at 17              

September​ 06:54 p.m. GMT

Description RIC Last U.S. Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar index 100.91 100.7 0.21% -0.45% 101 100.56

Euro/Dollar 1.1121 1.1133 -0.11% 0.75% $1.1146 $1.1111

Dollar/Yen 141.87 140.59 0.91% 0.59% 141.93 140.36

Euro/Yen 1.1121​ 156.53 0.79% 1.38% 157.87 156.06

Dollar/Swiss 0.8461 0.8449 0.15% 0.53% 0.8478 0.843

Sterling/Dollar 1.3163 1.3216 -0.4% 3.44% $1.3229 $1.3147​

Dollar/Canadian 1.3593 1.3587 0.06% 2.55% 1.3617 1.3581

Aussie/Dollar 0.6756 0.6752 0.07% -0.9% $0.6769 $0.6742

Euro/Swiss 0.9409 0.9403 0.06% 1.32% 0.9422 0.9383

Euro/Sterling 0.8447 0.8423 0.28% -2.55% 0.8454 0.8419

NZ Dollar/Dollar 0.6186 0.6201 -0.21% -2.07% $0.6211 0.6179

Dollar/Norway 10.5965​ 10.5865 0.09% 4.55% 10.623 10.5601

Euro/Norway 11.7859 11.786 0% 5.01% 11.8099 11.7553

Dollar/Sweden 10.1823 10.1687 0.13% 1.15% 10.2075 10.1504

Euro/Sweden 11.3252 11.322 0.03% 1.8% 11.3465 11.306

(Reporting by Chibuike Oguh in New York; additional reporting by Tom Westbrook and Linda Pasquini in London; Editing by Andrea Ricci, Alexandra Hudson and Nick Zieminski)