By Saikat Chatterjee
LONDON (Reuters) - The dollar weakened against its rivals on Tuesday, heading back towards a recent three-month low before a U.S. central bank meeting gets underway with expectations growing the Fed will signal its first rate cut in a decade.
A CME Fedwatch tool puts the probability of a quarter-point interest rate cut by the Fed at 20%, with a 70% probability of a rate cut at its next meeting in July.
But with so much dovishness already priced into the markets and the dollar having weakened 1% over the past three weeks, some market analysts say the greenback may strengthen if the Fed signals a more neutral stance.
"The majority view among the Fed comments does not suggest any particular appetite for an immediate rate cut, say in June or July," HSBC strategists said in a note. "The balance of risks favors being long the dollar, not least because positioning is likely a little lighter after the recent sell-off."
Against a basket of its rivals, the dollar edged 0.1% lower at 97.437 and not far away from a three-month low of 96.46 hit earlier this month.
While hedge funds have pared back some of their long positions on the dollar in recent weeks, overall net positions remain near 2019 highs.
The euro wallowed at the lower end of a recent trading range against the dollar, holding above the $1.12 line, as markets awaited a speech by European Central Bank chief Mario Draghi where he might shed some more light on how policymakers will fight the next economic downturn.
With benchmark interest rates in the eurozone already in negative territory and inflation expectations well below central bank forecasts, financial markets will be closely watching Draghi's comments.
Elsewhere, sterling held near the $1.2550 line as traders waited for news on the contest for the leadership of the ruling Conservative party.