© Reuters. FILE PHOTO: U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration//File Photo
By Kevin Buckland
TOKYO (Reuters) - The dollar languished well below last week's 2-1/2-month highs on Tuesday after unexpectedly soft U.S. services data firmed up expectations for a rate pause at the Federal Reserve's meeting next week but clouded the policy outlook for the months ahead.
The Aussie hovered not far from last week's high ahead of the Reserve Bank of Australia's policy decision later in the day, with analysts and investors split over whether the central bank will hike or hold.
Leading cryptocurrency bitcoin sagged toward the psychological $25,000 mark after U.S. regulators sued Binance, the world's biggest cryptocurrency exchange.
Global markets have been keenly focused on what the Fed might do at next week's meeting and thereafter, with data and comments from central bank officials causing some volatility in the dollar.
The U.S. dollar index - which measures the currency against six major peers - was flat at 104.00, after a shaky few days that saw it rally to a 2 1/2-month peak at 104.70 on the final day of May, only to get knocked back by suggestions by Fed officials that they would skip a rate hike in June.
However, hot employment numbers on Friday saw bets for a July hike ramp up, while the overnight weak services sector outcome has yet again clouded the outlook for rates.
The Federal Open Market Committee (FOMC) sets policy on June 14, and markets are now pricing in a 77% chance of the Fed standing still, a sharp jump from a 36% chance a week earlier, according to CME FedWatch tool.
"The soft ISM services PMI was unexpected to say the least," said Tony Sycamore, a market analyst at IG Markets in Sydney. "Services have been a real pocket of resilience."
With no major U.S. data for the remainder of the week and Fed officials in a "blackout" period, "it looks to me like the dollar is in a bit of a holding pattern ahead of the FOMC meeting," Sycamore said.
"That makes sense, because if you've got a position on here, you wouldn't want to add to it."
The dollar was little changed at 139.55 yen, while the euro edged 0.08% higher to $1.0718.
The Australian dollar was flat at $0.6617. It reached $0.66385 on Friday after a large hike to the minimum wage.
The currency had dropped to the lowest since early November on the final day of May, undermined by soft economic data at home and in key trading partner China.
"If you're the RBA and you're contemplating whether to pause or whether to tighten again, I think what we saw at the end of last week tips the balance firmly in favour of a rate hike," said IG's Sycamore, referring to the wage increase.
"The market is still short the Aussie dollar," he said. "If you see a hike today, the next stop will be 67 cents."
Money markets currently lay 35% odds on a quarter-point rate increase.
Elsewhere, bitcoin attempted to find its feet around $25,370, after tumbling 5.1% overnight in its biggest drop since April 19.
The Securities and Exchange Commission (SEC) sued Binance and its CEO Changpeng Zhao on Monday for allegedly operating a "web of deception," saying the exchange artificially inflated its trading volumes, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about its market surveillance controls.
