Dollar eyes monthly gain as markets look to Fed

US dollar rate index news: The dollar headed for its biggest monthly gain since September and the yen for its sharpest drop in nearly a year on Wednesday, as traders waited on a US rates decision to round out January.

The dollar has gained 2 per cent against a basket of major currencies this month as markets dialled back expectations on the speed and scale of rate cuts in the face of strong US economic data and pushback from central bankers.

In Japan, meanwhile, tepid wage growth and cooling inflation dulled expectations for hikes, driving the yen down more than 4 per cent on the dollar in January, its largest fall since Feb. 2023.

The dollar was steady at $1.0844 per euro and a touch weaker at 147.23 yen early in the Asia day, with a summary showing discussion of ending negative interest rates at the Bank of Japan's January meeting helping support the yen.

The dollar index last sat at 103.36. Sterling hovered at $1.2698. Later, the Federal Reserve is expected to hold US interest rates steady but flag cuts are coming by dropping language indicating it is weighing further hikes.

Interest rate futures price a roughly 43 per cent chance of a Fed rate cut in March, down from 73 per cent at the start of the year. "The market reaction to the (Fed) meeting and its spillover onto most asset markets is likely to be largely captured by the impact on the probability of a rate cut at the March meeting," said Deutsche Bank's chief international strategist Alan Ruskin.

The pricing tends to influence the euro/dollar rate, he noted, with a 50-50 probability consistent with the euro at $1.087. "A 100 per cent probability of a rate cut would point to euro/dollar at $1.1080, while a rate cut that is fully ruled out for March would point the way to euro/dollar at $1.0660," he said.

Ahead of the Fed, European inflation figures are expected. Australian inflation came in marginally below economist forecasts, reinforcing bets the central bank is done hiking. The Aussie slipped 0.2 per cent to $0.6588. The New Zealand dollar was steady at $0.6133.

Expectations of interest rate cuts in China have driven a strong rally in the bond market this month while the yuan has been squeezed by flight from China's crumbling equity markets. The Chinese currency <CNY=CFXS> held at 7.1781 on Wednesday, down 1 per cent for the month. China's manufacturing activity in January contracted for a fourth straight month, an official survey showed, suggesting the sprawling sector was struggling for momentum.