Dollar sags as optimism over US trade deals boosts bets on Fed easing

By Kevin Buckland and Johann M Cherian

TOKYO (Reuters) -The dollar slid on Monday against the yen and was pinned at its lowest in almost four years against the euro, as market optimism over U.S. trade deals bolstered bets for earlier interest rate cuts by the Federal Reserve.

The dollar also languished near a four-year low against sterling and a trough of more than a decade versus the Swiss franc after the White House neared a deal with China, while Canada scrapped a digital services tax to restart stalled talks.

Investors interpreted Fed Chair Jerome Powell's testimony to U.S. Congress last week as dovish, after he said rate cuts were likely if inflation did not spike this summer because of tariffs.

Bets for at least one quarter-point reduction by September have risen to 91.5%, CME Group's FedWatch Tool shows, from about 83% a week earlier. The Fed's rate-setting committee also meets next month, but does not gather in August.

A string of data reports are expected out of the U.S. this week including a key jobs report that could influence market expectations on what the central bank's next move might be.

"The balance of risks remains tilted to the downside for the dollar, but our calls for only a gradual slowdown in payrolls and an inflation bump in the coming months imply that markets have overshot on dovish pricing," said Francesco Pesole, an FX strategist at ING.

Pesole said that any disappointment in the data this week could prompt another round of dollar selling.

An additional weight on the dollar came from Donald Trump's continued assault on Powell, after the U.S. president said on Friday he would "love" it if the Fed chief resigned before his term ended in May.

Trump also said he wanted to cut the benchmark rate to 1% from 4.25% to 4.5% now, and reiterated that he planned to replace Powell with a more dovish Fed chairperson.

Investors are also keeping an eye on Trump's massive tax cut and spending bill now facing the Senate, which could add $3.3 trillion to the national debt over a decade, the Congressional Budget Office has estimated.

The dollar index, which measures the U.S. currency against six major counterparts, is on track for its biggest drop in the first six months to a year since the era of free-floating currencies began in the early 1970s.

The index was last flat at 97.183, staying close to its more than three-year low it hit last week.

The dollar slumped 0.4% to 144.11 yen, while the euro was little changed at $1.1723, not far from its highest since September 2021 it touched last week.

Sterling slipped 0.1% to $1.3701, hovering close to Thursday's peak of $1.37701, unseen since October 2021.

The greenback was muted against the Swiss franc and last fetched 0.7978 francs, after dipping on Friday to 0.7955 for the first time since January 2015, when the Swiss National Bank unexpectedly removed a cap on the currency's value against the euro.

On Friday, U.S. Treasury Secretary Scott Bessent said Washington and Beijing had resolved issues around shipments of Chinese rare earth minerals and magnets to the United States, further modifying a May deal in Geneva.

He also said trade deals with other countries could be done by the U.S. Labor Day holiday on September 1, suggesting some wiggle room on Trump's July 9 deadline to reach deals or face aggressive "reciprocal" tariffs.

"USD will be driven by U.S. trade developments this week in our view," Commonwealth Bank of Australia analysts wrote in their weekly foreign exchange strategy report.

"We are sceptical so many trade deals can be agreed so quickly," they said.

The yuan inched up 0.1% to 7.163 per dollar following the news on trade deals, while the Canadian dollar gave up some early gains and was last flat.

(Reporting by Kevin Buckland and Johann M Cherian; Editing by Jamie Freed, Clarence Fernandez and Saad Sayeed)