FOREX-Dollar drops versus yen, Swiss franc as Trump's tax bill and tariffs weigh

By Ankur Banerjee, Johann M Cherian

SINGAPORE, July 1 (Reuters) - The U.S. dollar weakened on Tuesday, falling the most against the Japanese yen and the Swiss franc, as President Donald Trump's massive tax-cut and spending bill stoked fiscal worries and uncertainty around trade deals weighed on sentiment.

Markets are grappling with the uncertainty over the U.S. Senate's efforts to pass Trump's budget bill since late last week and in an interview Treasury Secretary Scott Bessent said it could be approved as early as Tuesday afternoon.

The bill has faced internal party divisions over its projected $3.3 trillion addition to the national debt and fiscal concerns have prompted some investors to diversify.

The dollar slipped 0.6% to a new 10-year low and fetched 0.7890 Swiss francs CHF=EBS, while the greenback dropped 0.8% to 142.86 Japanese yen and was a hair's breadth away from touching a one-month low against the currency.

The yen capped the first half of the year with a 9% gain - its strongest performance since 2016.

The euro EUR=EBS edged up 0.26% and was last at $1.181 - its highest since late 2021. The single currency surged 13.8% in the January-June period, its strongest-ever first half performance, LSEG data showed.

Sterling inched up 0.2% to $1.376, not far from the three-and-a-half-year high it touched last week, while the dollar index =USD, which measures the U.S. currency against six others, slipped 0.3% to 96.698, its lowest since February 2022.

The index is down more than 10% this year, after logging its biggest first-half dive since the era of free-floating currencies began in the early 1970s on Monday, with analysts pointing out that the weakness was exacerbated by Trump's critique of the Federal Reserve.

"One of the things that underlies the dollar's reserve status and haven value is the idea that monetary policy will be independent," said Michael Brown, senior research strategist at Pepperstone.

"And it's pretty clear that in 9 or 10 months' time, whoever is Fed chair, the only reason they're going to be in the job is because they've likely promised President Trump that they are going to deliver (those) sizeable rate cuts."

Investors have also started wagering on a quicker pace of monetary policy easing by the Federal Reserve this year ahead of a slew of U.S. economic data this week, headlined by Thursday's nonfarm payrolls report.

Goldman Sachs now expects the Fed to deliver three quarter-point interest rate cuts this year compared with its earlier forecast of a single reduction in December, citing muted tariff effects and labour market weakness.

TRUMP VERSUS FED

Trump continued hammering the Fed to ease monetary policy, sending Fed Chair Jerome Powell a list of central bank interest rates around the world adorned with handwritten commentary saying the U.S. rate should be between Japan's 0.5% and Denmark's 1.75%.

Trump's constant tirade against the Fed and Powell has fuelled investor worries about the central bank's independence and its credibility. Trump cannot fire Powell over a policy dispute, but last week urged him to resign.

Investor focus will be on comments from Powell, who joins several other central bank chiefs at the European Central Bank forum in Sintra, Portugal, on Tuesday. Traders are now pricing in 68 basis points of easing from the Fed this year.

A survey on manufacturing activity along with a report on job openings is due later in the day in the U.S., ahead of Thursday's pivotal nonfarm payrolls figures.

Analysts say that any signs of labour market weakness could bolster bets for more interest rate cuts by the Fed and spark a new wave of dollar weakness.

With the July 9 deadline for Trump's tariffs fast approaching, investors are also keeping an eye on trade deals between the U.S. and its partners although there have not been many agreements so far.