By OLGA COTAGA
LONDON (Reuters) - The euro dropped to a three-week low against a broadly stronger dollar on Tuesday as investors re-assessed their expectations of how much the Federal Reserve may cut interest rates this month.
Following a stronger than expected non-farm payrolls report on Friday, traders are questioning "the excessive dovish hopes" they had for a Federal Reserve rate cut, said David Madden, an analyst at CMC Markets.
The common currency fell to a low of $1.1206 (EUR=EBS), its lowest since mid-June.
The dollar index, which measures the greenback against a basket of rival currencies, rose 0.1% to 97.488 (DXY), a three-week high.
Expectations of a 50-basis-point cut have reduced to 5.9% from a 25% chance seen last week. Investors also think there is a higher chance the Fed will not cut rates at the September meeting.
"There were simply too may dollar shorts built up before Powell's testimony," said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities in Tokyo.
Still, money markets are pricing in a 94% probability of a 25-basis-point rate cut at the Fed meeting on July 31, according to CME Group's FedWatch tool. A week ago, they saw a 75% chance of a cut.
Fed chief Jerome Powell's comments during two days of testimony to Congress beginning on Wednesday will be watched to determine whether traders will continue to reduce bets for deep interest rate cuts.
A cooling in the U.S.-China trade dispute since the G20 summit in Japan has added to dollar strength. "Things haven’t gotten worse at least and that’s a positive," said Madden.
Elsewhere, a rising dollar pushed the British pound down to a fresh six-month low of $1.2480 , the lowest since the "flash crash" on Jan. 3 when the pound dropped to $1.2409.
"The dollar is bouncing back, so there are some downside risks for the euro and cable (sterling-dollar)," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
Data on UK gross domestic product and industrial output are due Wednesday, while the Bank of England will release its financial stability report on Thursday, which could help traders gauge whether the BoE will take a more dovish view of the economy.
Last week Bank of England Governor Mark Carney said a global trade war and a no-deal Brexit were growing risks to Britain's economy. That prompted investors to increase their bets on a BoE interest rate cut.
The Turkish lira steadied after sharp declines caused by President Tayyip Erdogan's dismissal of the central bank governor over the weekend, a move that prompted worries about the bank's independence.
The lira at one point slid to a two-week low of 5.8245 to the dollar and was last quoted at 5.7335.