FOREX-Dollar hovers near 3-1/2-year low with market focus on US rate cuts, euro area inflation

By Lucy Raitano and Ankur Banerjee

LONDON/SINGAPORE, June 27 (Reuters) - The U.S. dollar was just above its lowest level in 3-1/2 years against the euro and sterling on Friday, with traders ramping up bets on deeper U.S. rate cuts, but tempering expectations of an ECB rate cut on higher inflation numbers from France and Spain.

The euro got a small uplift in early European trade after data showed French consumer prices rose more than expected in June, while Spain's 12-month EU-harmonised inflation also inched higher.

"Hotter French services CPI and Spain core CPI cast doubts on further ECB easing," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

"This week for (the) September meetings we've gone from -20bp to -27bp for the Fed and from -11bp to -13bp for the ECB," said Broux.

Meanwhile, the latest U.S. personal consumption expenditures (PCE) data further weighed on the dollar in afternoon trading.

U.S. consumer spending unexpectedly fell in May as the boost from the preemptive buying of goods like motor vehicles ahead of tariffs faded, while monthly inflation increases remained moderate.

By 1244 GMT, the euro EUR=EBS was 0.26% higher at $1.173, just a fraction away from the $1.1745 it hit in the previous session, its strongest level since September 2021.

Meanwhile the Swiss franc CHF=EBS was last at 0.7971 a dollar, rising to its strongest level in over a decade.

With the geopolitical tremors of the Israel-Iran conflict receding after a ceasefire that appeared to be holding, market focus this week has been on U.S. monetary policy, particularly given speculation that U.S. President Donald Trump will announce the next Federal Reserve chair earlier than usual to undermine current Chair Jerome Powell.

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.

Elsewhere, the yen JPY=EBS was unchanged at 144.47 a dollar, while sterling GBP=D3 last fetched $1.3745, just below the October 2021 top of $1.37701 touched on Thursday.

The dollar index =USD, which measures the U.S. unit versus six other currencies, was lingering near its lowest since March 2022 at 97.114, 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.

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.