Dollar edges down, kiwi firm despite rate cut expectations

Tokyo: The dollar edged down slightly in early Asian trade on Tuesday but remained supported by some confidence that the U.S. Federal Reserve could raise interest rates later this year, while New Zealand`s dollar inched up despite an expected rate cut later this week.

Fed funds futures prices showed traders now see almost a 50-50 chance of a U.S. rate hike by December, according to CME Group`s Fed Watch tool. That compares with 30 percent as recently as last week, before a better-than-expected nonfarm payrolls report on Friday.

The dollar index, which gauges the greenback against a basket of six major rivals, edged down 0.1 percent to 96.355, holding well above last week`s low of 95.003, which had been its lowest level since late June.

The dollar was down 0.2 percent at 102.33 yen , well above last week`s low of 100.68 yen, while the euro was steady at $1.1085.

The Reserve Bank of New Zealand, meanwhile, is widely expected to cut rates by 25 basis points to 2.00 percent at its policy meeting on Thursday, when regional forex liquidity is likely to be thinner than usual due to a public holiday in Japan.

Some 24 of 25 economists polled by Reuters are expecting an interest rate cut. Economists expect rates will be 1.75 percent by the fourth quarter and will then remain steady, although some are predicting rates are headed even lower.

"The market is pricing in 100 percent probability of a cut at the Reserve Bank of New Zealand`s meeting," Marshall Gittler, head of investment research at FXPrimus, said in a note. "In fact it`s pricing in 100 percent probability of at least one more cut this year after this one, maybe even two more."

"But with the highest interest rates in the G10 and risk aversion calming down – meaning carry trades becoming popular again – they have a lot of cutting to do," Gittler said, particularly since the market is also pricing in one more rate cut for the Australian dollar, the second-highest-yielding G10 currency.

The Australian dollar was up 0.1 percent at $0.7655 , while its kiwi counterpart added 0.2 percent to $0.7148 .