FOREX-Dollar reaches one-month high versus euro on trade deal optimism, Fed in view

By Chibuike Oguh

NEW YORK, July 29 (Reuters) - The dollar hit a one-month high versus the euro on Tuesday in the wake of a string of trade agreements between the United States and its major trade partners, while markets await interest rate decisions from the Federal Reserve and the Bank of Japan.

U.S. President Donald Trump struck his biggest trade deal yet with the European Union on Sunday, which imposes a 15% import tariff on most EU goods and includes $600 billion of EU investments into the United States. It tops a $550 billion deal signed with Japan last week that includes a 15% reciprocal tariff.

U.S. and Chinese officials finished two days of talks in Stockholm on Tuesday. While there were no signs of breakthroughs, both sides agreed to extend a 90-day tariff truce struck in mid-May, China's top trade negotiator, Li Chenggang, said.

The euro EUR=EBS was down 0.39% against the dollar at $1.154775, hitting its lowest level since June 23. The single currency had dropped 1.29% in the previous session, its steepest one-day decline since mid-May. The euro is poised to record its first monthly loss against the dollar this year.

"After falling sharply in the first half of the year, the dollar began July with a bounce, and I think it's mostly short covering. And the issue is whether this is a trend change or an overdue technical correction," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.30% to 98.91, hitting its highest level since June 23. The index is set to record its first month of gains this year.

"The market had a sigh of relief that the tariffs, at the least the plan announced with Japan and the EU and the likely 90-day extension with China, helped remove downside tail risk," Chandler said.

Several EU leaders have criticized the trade agreement reached with the United States. German Chancellor Friedrich Merz said his country would suffer significant damage due to the agreed tariffs. France's prime minister on Monday called the agreement a "dark day" for Europe.

Markets anticipate that the Fed will leave interest rates unchanged at the end of its two-day monetary policy meeting on Wednesday. U.S. Treasuries slipped on Tuesday, with the yield on benchmark U.S. 10-year notes US10YT=RR falling 8.6 basis points to 4.334%.

"Ahead of (Wednesday's) Fed decision, we might get some consolidation. People are concerned about a possible dissent from at least one of the governors, maybe it's Waller or Bowman," Chandler added.

Christopher Waller earlier this month said he believed the U.S. central bank should cut rates at its July meeting. Michelle Bowman, who is now the central bank's top bank overseer, in June said she was open to cutting rates at this month's meeting.

The Bank of Japan also is likely to hold off raising interest rates on Thursday after the Japanese trade agreement with the United States last week.

The dollar was down 0.05% to 148.465 against the Japanese yen JPY=EBS. Against the Swiss franc CHF=EBS, the dollar strengthened 0.28% to 0.806 franc.

"We expect the next leg of the Dollar weaker move to come from monetary policy rather than trade uncertainty," Goldman Sachs analysts led by Isabella Rosenberg wrote in an investor note. "The latest trade deal announcements and limited evidence of tariff passthrough to prices have lowered inflation uncertainty and put downward pressure on implied vol."