SINGAPORE (Reuters) – Dollar Stability Amid Rate Hike Speculation

The dollar held firm and near recent peaks on Tuesday, on the eve of an expected interest rate cut in the United States, as traders adjust long-term rate expectations higher.

The underperforming euro, facing a nearly 5% drop against the dollar this calendar year, hovered close to lows at $1.0518.

The gap between U.S. and German ten-year yields stands at 216 basis points, having widened nearly 70 basis points in the last three months.

The yen remains weak for the seventh consecutive session, now marginally lower at 154.17 per dollar in morning trade. Markets have reduced chances for a Japanese rate hike this week, anticipating a move in January instead.

On Wednesday, the Federal Reserve will announce its interest rate decision, with futures suggesting a 94% chance of a cut, despite a surge in services-sector activity hitting a three-year high, according to an S&P Global purchasing managers survey.

The Atlanta Fed's GDPNow indicator is at 3.3% for the fourth quarter, reflecting economic strength that lifts yields and supports the dollar as traders consider this week’s cut might be the last for some time.

Post-cut, there's a 37% probability for either one 25 basis point cut or none through 2025, per the CME FedWatch tool, a rise from about 21% a week earlier.

Brent Donnelly, president at Spectra Markets, suggests the Fed is concerned about a potential resurgence of inflation, given an uncertain policy landscape and persistent price pressures, indicating a cautious approach going forward and a focus on inflation concerns and a higher neutral rate.

Besides the Fed, the Bank of Japan, Bank of England, and Norges Bank will meet this week, likely maintaining rates, while the Riksbank is expected to implement a rate cut of about 50 basis points.

Sterling saw a bounce on Monday after a business activity survey suggested price increases in Britain; labor data due Tuesday is expected to indicate upward wage pressures, which could prompt the central bank to be more cautious. Sterling was last priced at $1.2695.

The Canadian dollar dropped to a 4-1/2 year low on Monday due to falling interest rates and looming U.S. tariffs, compounded by Finance Minister Chrystia Freeland's sudden resignation putting the government under more strain.

The Australian and New Zealand dollars remain near yearly lows, yet avoided further declines despite weak Chinese economic indicators. Markets speculate that government spending will help improve conditions. The Aussie stood steady at $0.6373 and the kiwi rose slightly to $0.5792. New Zealand has upped its bond issuance forecast for the coming years, leading to a rise in long-term yields.

China's yuan faced slight pressure at 7.2918 in offshore trading, with dismal expectations for Chinese economic growth driving 10-year bond yields to record lows.

(This story has been corrected to indicate rate futures imply a 94% chance of a cut, not a hike, in paragraph 5.)