FOREX-Dollar edges down, snapping four days of gains, before Fed meeting

By Stefano Rebaudo and Ankur Banerjee

July 30 (Reuters) - The U.S. dollar index slipped on Wednesday, snapping a four-day winning streak as investors turned cautious ahead of a Federal Reserve policy meeting, following a sharp reaction to a U.S.-European Union trade deal earlier this week.

Meanwhile, the euro was poised to record its first monthly drop since December 2024.

The Japanese yen JPY=EBS firmed against the dollar after a powerful earthquake struck off Russia's Far Eastern Kamchatka Peninsula and generated a tsunami, prompting evacuation warnings along most of Japan's east coast.

Currency markets were mostly steady as investors were hesitant to place bets before crucial economic reports and central bank meetings in Canada, Japan and the United States.

“Markets will be paying attention to (Fed Chair) Jerome Powell’s remarks, regarding any signs of internal dissent within the committee and the chair’s stance amid ongoing tensions with the White House,” said Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management.

“A rate cut in September remains a strong base case, much will depend on incoming data, starting with the U.S. jobs report due this Friday,” he added.

The U.S. central bank will likely leave interest rates unchanged on Wednesday.

Analysts noted the selloff in U.S. assets — including Treasuries and the dollar — began in early April, when the U.S. appeared poised to launch a trade war against its major allies.

Trade agreements struck with Japan last week and the EU over the weekend signalled a renewed U.S. commitment to global engagement, easing investor concerns.

Investors' focus is now on negotiations between China and the U.S. after officials agreed to seek an extension of their 90-day tariff truce, following two days of what both sides described as constructive talks in Stockholm.

The euro EUR=EBS was up 0.15% to $1.1562 after dropping for the first two days of the week and hitting a one-month low of $1.15185 on Tuesday. The euro is up 11.9% since the start of the year but on course for its first monthly drop in 2025.

Some analysts expressed concern about the economic impact of tariffs and their implications for the European Central Bank’s rate outlook.

However, markets adjusted their expectations for the ECB’s easing path, pushing back the timing of a potential rate cut to March 2026 last week, following the U.S.-Japan trade deal and a hawkish tilt from the central bank after its policy meeting.

“On a comparative basis, the outcome (of trade negotiations) is welcome, if not wholly reassuring (for the euro area),” said Modupe Adegbembo, economist at Jefferies.

“The EU has successfully avoided escalation and has not lost significant ground relative to other major exporters,” he added, recalling that the 5% baseline tariff is more favourable than the 30% applied to Chinese goods and is on par with Japan’s 15%.

U.S. tariffs of 15% on EU goods will dampen euro zone economic growth compared to six months ago, but the reduced risk of a damaging trade war will partially offset the hit, ECB policymaker Gabriel Makhlouf said.

The dollar index =USD was down 0.13% at 98.774. It hit a 5-week high at 99.143 on Tuesday and was on course to post its first month of gains this year.

The yen firmed 0.33% to 147.98 against the dollar. JPY=EBS

The spotlight will be on comments from BoJ Governor Kazuo Ueda as investors hope the recent trade deal between Japan and the U.S. paves the way for the central bank to raise interest rates again this year.

Christopher Wong, currency strategist at OCBC, said yen strength was probably exacerbated by thin market liquidity.