Dollar Pulls Back Ahead of Fed Meeting, Traders Cautiously Watch for Clues

The U.S. dollar edged lower on Tuesday, with investors growing increasingly cautious about holding U.S. assets amid ongoing concerns over economic growth and the volatility surrounding President Donald Trump’s trade policies.

As of 04:30 ET (08:30 GMT), the U.S. Dollar Index (DXY)—which measures the greenback against a basket of six major currencies—was down 0.2% at 99.420. The index has fallen 4.3% in April so far, marking its steepest monthly drop in over two years.

Caution Builds Ahead of Fed Decision

The dollar has surrendered much of last week’s gains as hopes for progress on global trade deals faded. Optimism had briefly returned following a statement from Beijing indicating a willingness to consider Washington’s latest offer for trade talks, but the lack of follow-through has dampened sentiment once again.

Market participants are also taking a cautious stance ahead of the Federal Reserve’s policy decision on Wednesday. The central bank begins its two-day meeting later today and is widely expected to leave interest rates unchanged. Investors will closely analyze the Fed’s tone for any hints on how trade tensions may be affecting the U.S. economic outlook—particularly as this is the first Fed meeting since the escalation of the trade war.

“We expect Chair Jerome Powell to keep resisting pressure from the Trump administration to cut rates,” noted analysts at ING. “Powell recently emphasized that a strong labor market cannot be sustained without price stability. We still anticipate the first rate cut in September, even though markets are currently pricing in around 23 basis points of easing by July.”

Euro Gains on PMI Support

The euro rose in Tuesday trade, with EUR/USD climbing 0.3% to 1.1343, buoyed by a combination of dollar weakness and encouraging economic data from the eurozone. April’s Purchasing Managers’ Index (PMI) data showed the region’s economy just entering expansion territory, with the composite reading at 50.4, marginally above the 50-mark threshold.

Notably, Germany—the eurozone’s largest economy—also posted a surprise expansion, with its composite PMI at 50.1, surpassing forecasts of 49.7. Despite this, ING cautioned that, “The majority of EUR/USD moves still depend on market sentiment on USD-denominated assets. The 1.1300 level remains a key anchor—if broken, a slide toward 1.1200 could follow.”

Pound Firms Ahead of BoE Decision

The British pound also gained ground, with GBP/USD rising 0.2% to 1.3324 as traders prepare for the Bank of England’s (BoE) policy meeting later this week. Markets widely expect the BoE to lower rates by 25 basis points.

“We anticipate an 8-1 vote split, with one member possibly supporting a 50bp cut,” ING said. “We also expect no changes in the forward guidance, which is likely to emphasize that future cuts will be gradual and carefully considered.”

Yen and Yuan Strengthen on Regional Developments

In Asia, the Japanese yen continued to strengthen, with USD/JPY falling 0.5% to 143.02. This followed a 0.9% gain in the previous session, although overall trading volumes remained thin due to a Japanese public holiday.

Meanwhile, USD/CNY dropped 0.8% to 7.2145, its lowest level since late March, as trading resumed after an extended holiday. Despite softer-than-expected private services PMI data, the yuan was supported by news that Beijing is actively reviewing U.S. proposals for renewed trade negotiations, signaling a possible easing in the China-U.S. trade standoff.

Asian FX Reacts to Dollar Positioning

Elsewhere in the region, USD/TWD surged 2.7% to 29.959, reversing some of the Taiwanese dollar’s recent 8% rally, which had propelled it to a three-year high. Analysts suggest that this pair may be at the center of an emerging shift in long-dollar positioning among Asian currencies, potentially providing support for other regional units in the near term.