Dollar near 2.5 month lows as bets on rate cut grow

CURRENCY - LONDON. The dollar held above a recent two-and-a-half-month low on Tuesday as bets on an interest rate cut by the Federal Reserve increased, although investors were wary of selling aggressively before a Group of 20 summit this month.

Markets are only pricing in about a 20% chance of a rate cut in June, but they are pricing in about 100% chance of a cut by July. A policy meeting is due next week.

"Bets of U.S. rate cuts have been rising quickly in recent days and we think the pricing has become too aggressive so the dollar's downside is limited," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

Against a basket of other currencies, the dollar was steady at 96.80, near a late March low of 96.46. It has fallen 1% so far this month.

Recent dovish comments from Fed officials and weak economic data have bolstered expectations for rate cuts. But markets are also looking to a G20 meeting in Osaka, Japan, on June 28-29.

U.S. President Donald Trump said on Monday he was ready to impose more tariffs if talks at the summit with China's president, Xi Jinping, make no progress.

"It might not happen if the Chinese side thinks there isn't any point in having a meeting if the opinions are far apart from the start," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

"Trump has been applying pressure by emphasising there will surely be a meeting, but it isn't clear what the Chinese side will do."

Elsewhere, the pound was lower as a leadership contest for the ruling Conservative Party got underway this week. The euro edged to a five-month high against the pound to 89.32 pence before British employment data.

Recent data, particularly manufacturing figures, have been weak, fuelling expectations that the next move from the Bank of England will be a rate cut. Policymakers, however, have adopted an unexpectedly hawkish stance.

The Bank of England will probably need to raise interest rates sooner than financial markets expect, policymaker Michael Saunders said on Monday.