FOREX-Dollar sags as optimism over US trade deals boosts bets on Fed easing

By Kevin Buckland

TOKYO, June 30 (Reuters) - The dollar slid on Monday against the yen and wallowed near its lowest in almost four years against the euro, as market optimism over U.S. trade deals bolstered bets for earlier interest rate cuts by the Federal Reserve.

The dollar also languished near a four-year low against sterling and a trough of more than decade versus the Swiss franc after the White House neared a deal with China, while Canada scrapped a digital services tax to restart stalled talks.

Both the yuan and Canadian dollar gained.

Investors interpreted Fed Chair Jerome Powell's testimony to U.S. Congress last week as dovish, after he said rate cuts were likely if inflation did not spike this summer because of tariffs.

Bets for at least one quarter-point reduction by September have risen to 91.5%, CME Group's FedWatch Tool shows, from about 83% a week earlier. The Fed's rate-setting committee also meets next month, but does not gather in August.

"The market pricing implies a (September) cut as a slam dunk," Chris Weston, head of research at Pepperstone, wrote in a client note.

Friday's monthly U.S. payrolls report is this week's "marquee risk event", Weston said, and the risk to the dollar "seems asymmetric, given the Fed's reaction function is biased towards the timing of the next cut."

That meant the dollar was more likely to suffer a rout on weak numbers than rally on a hot outcome, he added.

An additional weight on the dollar came from Donald Trump's continued assault on Powell, after the U.S. president said on Friday he would "love" it if the Fed chief resigned before his term ended in May.

Trump also said he wanted to cut the benchmark rate to 1% from 4.25% to 4.5% now, and reiterated that he planned to replace Powell with a more dovish Fed chairperson.

Investors are also keeping an eye on Trump's massive tax-cut and spending bill now facing the Senate, which could add $3.3 trillion to the national debt over a decade, the Congressional Budget Office has estimated.

The dollar index =USD, which measures the U.S. currency against six major counterparts, edged down 0.1% to 97.083, staying close to its more than three-year low of 96.933 late last week.

The euro EUR= gained 0.1% to $1.1732, just off Friday's level of $1.1754, its highest since September 2021.

Sterling GBP=D3 added 0.1% to $1.3732, hovering close to Thursday's peak of $1.37701, unseen since October 2021.

The dollar eased 0.1% to 0.7978 Swiss franc CHF=, after dipping on Friday to 0.7955 for the first time since January 2015, when the Swiss National Bank unexpectedly removed a cap on the currency's value against the euro.

The U.S. currency slumped 0.5% to 143.90 yen JPY=, and tumbled 1.1% to 1,349.40 Korean won KRW=.

On Friday, U.S. Treasury Secretary Scott Bessent said Washington and Beijing had resolved issues around shipments of Chinese rare earth minerals and magnets to the United States, further modifying a May deal in Geneva.

He also said trade deals with other countries could be done by the U.S. Labor Day holiday on September 1, suggesting some wiggle room on Trump's July 9 deadline to reach deals or face aggressive "reciprocal" tariffs.

"USD will be driven by U.S. trade developments this week in our view," Commonwealth Bank of Australia analysts wrote in their weekly foreign exchange strategy report.

"We are sceptical so many trade deals can be agreed so quickly," they said.

"Nonetheless, news that some trade deals have been agreed will support the USD against the major currencies - EUR, JPY and GBP - (and) the USD will likely decrease against other currencies, such as AUD."

The risk-sensitive Australian dollar AUD= rose 0.3% to $0.6550, edging back towards Thursday's 7-1/2-month high of $0.6563.

The New Zealand dollar NZD= climbed 0.5% to $0.6083.

The Canadian dollar CAD= added 0.1% to C$1.3661 per greenback.

The Chinese yuan CNH= strengthened 0.2% to 7.1596 per dollar in offshore trading.