U.S. dollar sags after weak data; investors bet on Fed near end of rate-hike cycle

NEW YORK/LONDON, April 4 (Reuters) - The U.S. dollar tumbled to a two-month low on Tuesday in choppy trading after another round of weak economic data reinforcing investor bets that the Federal Reserve is nearly done with its tightening cycle even as other central banks are seen still raising interest rates to overcome persistently high inflation.

Sterling rose to a new 10-month high against the dollar, while the euro reached its highest since February.

"We believe the buck will slowly but surely continue to dwindle as the challenges of a recovering economy that wants to get away from dollar dominance will put downward pressure on its value," said Juan Perez, director of trading at Monex USA in Washington.

Data showing U.S. job openings in February dropping to the lowest level in nearly two years, as well as the continued decline in factory orders, sank the dollar as the numbers indicated that rate hikes may be nearing an end.

Job openings, a measure of labor demand, decreased 632,000 to 9.9 million on the last day of February, the lowest since May 2021, according to the monthly Job Openings and Labor Turnover Survey, or JOLTS report.

U.S. factory orders also declined for a second straight month, down 0.7% in February after falling 2.1% in January from the 1.7% jump in December.

In late morning trading, the dollar index dropped to a two-month low of 101.51 and was last down 0.5% at 101.53.

"We have a lot of data to chew on this week that will either show that the U.S. economy is resilient enough to withstand the Fed's ongoing rate-hike mentality or if the markets will get their break," said Monex's Perez.

"Add poor data to a banking crisis, plus oil supply cost raise and you may get more favorable odds for rate cuts by next year."

On Tuesday, the rate futures market priced in a roughly even chance of a 25 basis-point rate hike in May, with rest of the odds tilted towards a pause from the Fed. On Monday, the probability of a 25-bp hike was more than 65%.

The rates market has also factored in Fed cuts by end-December.

Sterling rose to $1.2520, its highest since June 2022, after breaching a significant resistance level. The pound last changed hands at $1.2508, up 0.8%.

"$1.2448 has been a huge technical chart resistance. It has been a high twice this year," said Joe Tuckey, head of FX analysis at Argentex. "Breaking through this means it is an initiation point for fresh sterling buyers, a short covering area for sterling shorts."

The euro reached $1.0964, its most in two months. It was last up 0.5% at $1.0956.

Traders still think the European Central Bank has more rate hikes to come however.

On the other hand, the Reserve Bank of Australia (RBA), as expected, left its cash rate unchanged at 3.6%, breaking a run of 10 straight hikes as policymakers said additional time was needed to "assess the impact of the increase in interest rates to date and the economic outlook".

The Australian dollar was last down 0.7% at US$0.6739 .

Elsewhere, the dollar fell 0.6% against the Japanese yen to 131.74 .

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Currency bid prices at 10:56AM (1456 GMT)