The dollar hit a seven-week low on Tuesday as investors braced for revised US data that could indicate the labor market is in worse shape than initially estimated, strengthening the likelihood of a deeper Fed rate cut.

The dollar weakened 0.7% against the Japanese yen to 146.32, its weakest level since mid-August, while the pound rose 0.2% to $1.3558. The euro weakened to $1.1752 after touching its strongest level since July 24.

A Bloomberg news report that Bank of Japan officials believe benchmark interest rates could be raised again this year also contributed to the Japanese currency's strength. The yen is likely to be exposed to higher volatility due to ongoing political uncertainty and was likely helped on Tuesday by market participants raising expectations for a BoJ rate hike, said Samy Chaar, chief economist at Lombard Odier.

Against a basket of major currencies, the dollar sank to a low of 97.25, its weakest level since late July, ahead of the release of preliminary revisions to the benchmark employment data covering the period from April 2024 to March 2025. Economists anticipate a downward revision of 800,000 jobs, which could signal the Fed is lagging behind in its efforts to achieve maximum employment.

While the revised employment data could raise expectations for a large interest rate cut, inflation data due later this week could also dampen those expectations, Chaar said.

U.S. producer price inflation data is due on Wednesday, followed by consumer price inflation data on Thursday. These data points will be the focus for gauging the impact of tariffs on prices in the world's largest economy.

Traders' expectations for more aggressive Fed policy easing are gradually increasing. Money markets have fully priced in a 25 basis point rate cut, and the odds of a very large 50 basis point cut have also risen to nearly 12%, according to the CME FedWatch tool.

Rising expectations of policy easing by the Fed also helped lift spot gold prices to a record high of $3,659.10 per ounce on Tuesday. Among other currencies, the Norwegian krone strengthened about 0.2% against the dollar and the euro after Norway's minority Labour Party government won a second term in office on Monday.

Political developments from Tokyo to Buenos Aires are likely to remain a focus for investors following the resignation of Japanese Prime Minister Shigeru Ishiba, the dismissal of French Prime Minister Francois Bayrou, and the abrupt dismissal of Indonesia's finance chief, all of which occurred in recent days. "While political uncertainty is an unfortunate development, we remain confident that it alone will not be enough to trigger euro weakness," said Lee Hardman, senior currency analyst at MUFG, in a note.

Later this week, the European Central Bank is expected to keep its benchmark interest rate unchanged at its policy meeting on Thursday. Economists were divided last month over the likelihood of further rate cuts by the ECB, but sentiment has shifted with recent data showing inflation holding near its 2% target and unemployment at a record low.

Meanwhile, the rupiah weakened 1% after the government replaced its finance minister on Monday. Bank Indonesia was seen buying long-dated government bonds on Tuesday in an effort to stabilize the market, according to two traders. (alg)

Source: Reuters