Dollar ebbs as investors prep for Fed decision

The dollar eased on Monday, ahead of a week packed with central bank meetings and headlined by the U.S. Federal Reserve, where an interest rate cut is all but priced in, although the committee is sharply divided.

Besides the Fed decision on Wednesday, the central banks of Australia, Brazil, Canada and Switzerland also hold rate-setting meetings, although none of these are expected to change monetary policy.

Analysts expect the Fed to make a "hawkish cut," in which the language of the statement, median forecasts and Chairman Jerome Powell's press conference point to a higher bar for further rate reduction.

That could support the dollar if it pushes investors to dial back expectations for two or three rate cuts next year, though messaging could be complicated by policymakers' divisions; several have already all but indicated their voting intentions.

"We expect to see some dissents, potentially from both hawkish and dovish members," said BNY's head of markets macro strategy Bob Savage in a note to clients.

The Federal Open Market Committee has not had three or more dissents at a meeting since 2019, and it has happened just nine times since 1990.

Even though the U.S. currency has drifted lower for the past three weeks, dollar bulls have recovered some of their nerve.

Weekly positioning data shows speculators hold their largest long position, that assumes the value of the dollar will rise, since before President Donald Trump's "Liberation Day" tariff bombshell, which sent the currency tumbling.

The labor market is softening, but overall growth is holding steady, the stimulus from Trump's "One Big Beautiful Bill" should start to filter through and inflation is still well above the central bank's target rate of 2%.

"These factors could discourage additional rate cuts if they spill over into stronger labour market conditions," MUFG currency strategist Lee Hardman said.

Beyond U.S. monetary policy, the euro edged upwawrd 0.1% to $1.1651, lifted by higher euro zone bond yields. German 30-year yields hit their highest since 2011 in early trading.

Unlike the Fed, the ECB is not expected to cut rates again in the coming year. Influential policymaker Isabel Schnabel on Monday said the central bank's next move could even be a hike.

The Australian dollar briefly touched a high of $0.6649, the highest since mid-September, to last trade flat on the day at $0.6637.

The Reserve Bank of Australia meets on Tuesday after a run of hot data on inflation, economic growth and household spending. Futures imply the next move will be up and possibly as soon as May, leaving the focus on the post-meeting statement and media conference.

"We expect the RBA to be on an extended hold, with the cash rate to remain at its current level of 3.60%," said analysts at ANZ in a note last week, revising previous expectations for a cut.