FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 19, 2025. REUTERS/Dado Ruvic/Illustration/File Photo

By Ankur Banerjee

SINGAPORE (Reuters) - The U.S. dollar loitered near four-year lows against the euro and a one-month trough against the yen on Wednesday, as traders geared up for a near-certain interest rate cut from the Federal Reserve later in the session.

Traders have fully priced in a 25 basis point cut and the focus will be on comments from Chair Jerome Powell after the decision to gauge the pace of future easing. Markets are pricing in 67.9 bps of cuts by the end of the year.

The spotlight will also be on whether policymakers considered a bigger 50 bps cut at a time when President Donald Trump pushes ahead with efforts to overhaul a pillar of the U.S. economy, stoking concerns about the central bank's independence.

The currency market was fairly subdued in Asian hours as traders were reluctant to place major bets ahead of the meeting. The euro eased a touch to $1.1852, just below the four-year high of $1.18785 it hit on Tuesday.

Sterling was steady at $1.3642, hovering near 2-1/2-month highs after weaker British jobs data on Tuesday did not shake investors' belief that the Bank of England would keep rates steady this week.

The dollar index, which measures the U.S. unit against six others, was at 96.686, languishing near its lowest since early July. The index is down nearly 11% this year, with investors bracing for further losses after a recent pause.

"The risk is that the Fed’s punchbowl for risk assets comes with a hangover," said Laura Cooper, senior macro strategist at Nuveen. "A cautious signal, or penciling in fewer cuts than markets are pricing, could shake the risk rally."

"With six cuts priced over the next year, the real story is not the size of the move this week, but how Powell frames the path. A hawkish cut risks deflating the risk rally in the near-term."

The Fed began a two-day meeting on Tuesday with a new governor on leave from the Trump administration joining the deliberations, and a second policymaker at the table still facing efforts by Trump to oust her.

A federal appeals court on Monday blocked Fed Governor Lisa Cook's firing, paving the way for the Biden appointee to participate fully in the policy meeting this week.

Data on Tuesday showed U.S. retail sales increased more than expected in August as consumers bought a range of goods and dined out, but a weakening labour market and rising prices because of tariffs pose a downside risk to continued strength in spending.

Benoit Anne, managing director at MFS Investment Management, does not expect Powell to provide strong forward guidance at this juncture.

"Being data dependent and providing forward guidance do not work that well together... the bar is really high to produce a dovish surprise, given how much easing has already been priced in by the rates market."

The Swiss franc eased to 0.7869 per U.S. dollar in Asian hours, near the decade high it touched in the previous session. The Australian dollar hit a 11 month high and was last at $0.6675.

The Japanese yen firmed in early trading to 146.22 per dollar, its strongest in a month ahead of the Bank of Japan policy meeting on Friday where the central bank is expected to stand pat on rates. It was last at 146.49.

The spotlight is on an October 4 vote where the ruling Liberal Democratic Party will elect a new leader to replace outgoing Prime Minister Shigeru Ishiba.

"It is unlikely BOJ will move ahead of the elections and considering the potential Fed cut to come this week," said Howe Chung Wan, head of Asian fixed income at Principal Asset Management.

"Our base case is for the next hike to take place in early 2026 as markets may take time to see how the new leadership comes into place."

(Reporting by Ankur Banerjee in Singapore; Editing by Jacqueline Wong and Kim Coghill)