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

By Ankur Banerjee and Lucy Raitano

SINGAPORE/LONDON, June 27 (Reuters) - The U.S. dollar hovered near its lowest level in 3-1/2 years against the euro and sterling on Friday, as traders wagered on deeper U.S. rate cuts while awaiting trade deals ahead of a July deadline for President Donald Trump's tariffs.

The euro got a small uplift in early European trade after the latest data showed French consumer prices rose more than expected in June.

By 0808 GMT, the euro EUR=EBS was 0.2% higher at $1.17208 a fraction away from the $1.1745 it hit in the previous session, its strongest since September 2021. Sterling GBP=D3 last fetched $1.3742, just below the October 2021 top of $1.37701 touched on Thursday.

With the geopolitical tremors of the Israel-Iran conflict in the rear view mirror 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'," Carol Kong, a currency strategist at Commonwealth Bank of Australia, said.

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 the U.S. central bank's independence and credibility.

The dollar index =USD, which measures the U.S. unit versus six other currencies, was lingering near its lowest since March 2022 at 97.159, on course for a 2.3% 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 JPY=EBS was unchanged at 144.375 a dollar, while the Swiss franc CHF=EBS was last at 0.799 a dollar, perched near its strongest level in a decade.

Traders are looking ahead to 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.

"The story now is for more rate cuts, and a lower print could accelerate this, but expectations are already quite low," Michael Pfister, FX analyst at Commerzbank, said.

Investors 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.

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