Dollar Weakens Further as Market Positions for Rate Cuts

The dollar continued its decline in early trading in Europe Tuesday, with the yen and euro strengthening as traders anticipate the erosion of the interest rate premium on dollar assets.

Overnight, the dollar fell to a 14-month low of 106.79 against the yen, before recovering slightly to trade at 106.97 by 3.45 AM ET (0745 GMT). The dollar index, which measures the greenback against a basket of developed-market currencies, also hit a three-month low of 95.468 before bouncing to 95.488.

The euro, meanwhile, hit a three-month high of $1.1413 before consolidating just under $1.1400, due partly to a weaker-than-expected Insee business survey in France. That follows a day after a similarly gloomy reading from the Ifo research institute on German business sentiment.

Caution remains the watchword of the day after Iran responded to U.S. sanctions on its supreme leader Ayatollah Khamenei by saying that the diplomatic channel for communications had been “closed forever”. Even so, the largely symbolic sanctions announced on Monday haven't been enough to trigger any major inflows into safe assets.

There is little incentive for traders to take new positions ahead of the crucial G20 summit at the weekend, where U.S. President Donald Trump and his Chinese counterpart Xi Jinping are due to meet. A telephone call between the two sides’ chief trade negotiators late Monday yielded no new detail but at least avoided a public breakdown of communication.

The currency market’s focus later Tuesday is likely to be on Federal Reserve Chairman Jerome Powell, who is due to speak at 1 PM ET (1700 GMT). Powell came in for fresh criticism from Trump on Monday, who accused the Fed of acting like a “stubborn child” for not cutting interest rates at its meeting last week.

Elsewhere, the British pound continued its recent recovery on reports that Conservative Party lawmakers were making plans to stop Boris Johnson from taking the U.K. out of the European Union without a deal on Oct. 31 if, as expected, Johnson wins the ongoing party leadership contest.

In other news, the Turkish lira struggled to build on its sharp gains of Monday. It was little changed at 5.8197 to the dollar.