Kevin Backlund
TOKYO (Reuters) – The dollar gave up some of its overnight gains and fell in foreign exchange markets on Wednesday, while Asian shares weakened as traders focused on the possibility of a bigger interest rate cut by the U.S. Federal Reserve later in the day.
The dollar fell sharply against the yen, giving back about half of the gains from Tuesday when unexpectedly strong U.S. retail sales data was seen as weakening the case for aggressive monetary easing by the Fed.
However, short-term U.S. Treasury yields rose slightly.
The likelihood of the Fed kicking off an easing cycle with a mega-50 basis points (bps) rate cut fluctuated in Asia, falling from 67% at the same time on Tuesday to 63% earlier in the day before stabilizing at around 65%, according to LSEG data.
The Japanese yen rose as much as 1.3 percent in early trading on the yen’s overnight weakness, but gains had narrowed to just 0.23 percent by 0526 GMT as the currency rebounded.
China’s blue chip stocks fell 0.18% after resuming trading after a long holiday weekend, while Taiwan also fell 1% as it returned from a holiday, and the Australian index was down 0.1%.
MSCI’s broadest index of Asia-Pacific shares ex-Japan fell 0.27%.
Hong Kong and South Korea were among the major markets closed for public holidays.
Wall Street finished little changed on Tuesday, failing to maintain early momentum that had propelled the Dow Jones Industrial Average and stocks to intraday highs after rising 0.06% on Wednesday.
Pan-European STOXX 50 futures were weaker, however, down 0.19%.
“The (U.S.) price action signals a significant inflection point the market is facing,” said Kyle Rodda, senior financial markets analyst at Capital.com.
“If the Fed is successful at this meeting, the bull market could continue. If not, this could mark the peak of this cycle.”
The dollar was down 0.67% to 141.365 yen after rising 1.26% overnight.
The euro rose 0.05% to $1.1119, while the pound was flat at $1.3158.
At the same time, the yield on the two-year Treasury note rose slightly to 3.5962%, continuing Tuesday’s gains.
Commonwealth Bank of Australia (OTC:) analyst Christina Clifton expects a quarter-point cut from the Fed, “because history has shown that the FOMC needs a very good reason to initiate a rate cutting cycle of 25 bps or more.”
But if more aggressive monetary easing were to take place, the dollar’s response could change dramatically, she said.
“A 50 basis point cut that makes markets nervous about the outlook for the U.S. economy could boost the safe haven dollar,” Clifton said. “But a 50 basis point cut that eases concerns about the outlook for the U.S. economy could weaken the dollar.”
Gold, meanwhile, struggled to recover on Wednesday, slipping from a record high hit the previous day and down 0.1% to $2,567 an ounce.
Oil prices also fell after rising by about $1 a barrel on Wednesday amid rising tensions in the Middle East.
The militant group Hezbollah has vowed to retaliate against Israel after pager explosions across Lebanon on Tuesday killed at least eight people and injured around 3,000.
Meanwhile, the Libyan mission to the United Nations said factions had failed to reach a final agreement in talks aimed at resolving a central bank crisis that has drastically reduced oil production and exports.
Futures were down 49 cents to $70.70 in recent trading, while futures were down 47 cents to $73.23.
