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The dollar was on the defensive and trading by multi-month lows on the euro and a handful of other major currencies on Tuesday, as investors expect U.S. interest rates to fall next year and see that as a signal to sell the dollar in anticipation.

Moves were modest in early Asia trade, but the dollar index had dropped below its 200-day moving average on Monday as a rally in the yuan spurred another round of broad weakness.

The index, which measures the dollar against a basket of six major currencies, fell 1.9% last week alongside a big rally in U.S. Treasures, and lost a further 0.5% overnight to 103.44.

The euro touched a three-month high of $1.0952 on Monday, with a little help from European Central Bank governing member and reliable hawk Pierre Wunsch pushing back against market expectations for rate cuts as soon as April.

The yuan also hit a three-month high on the dollar on Monday as the central bank guided it higher. The Australian and New Zealand dollars had followed suit.

"The dollar continues to struggle, with the dollar index breaking below 104 on Friday and (now) below 103.5 ... as markets decide that the Fed is done," analysts at ANZ said in a note.

"Given how overvalued the (index) is, gravitational (pull)back to fair value is likely to be a strong theme if markets continue to take a relaxed view of where Fed policy is going."

On Monday, one U.S. recession gauge, the Conference Board's October leading economic indicator showed a decline of 0.8%, its 19th straight monthly fall. The next focus is on Federal Reserve meeting minutes due later on Tuesday.

Markets have all but priced out the risk of a further hike in December or next year, and imply a 1-in-4 chance of an easing starting in March. Futures also imply around 90 basis points of cuts for 2024, up from 77 basis points before a benign October U.S. inflation report shook markets.

In thin offshore trade on Tuesday morning, the yuan held its gains at 7.1640 per dollar. [CNY/]

The Australian dollar was marginally firmer at $0.6561, just below Monday's three-month high of $0.6564. The New Zealand dollar was steady at $0.6040. [AUD/]

Even the yen rallied to a seven-week high of 148.1 per dollar overnight and steadied at 148.3 on Tuesday.

The yen has been unloved this year, falling 11.6% on the dollar, as U.S. interest rates have climbed while Japan stuck to ultra-easy policy - opening a wide gap between government bond yields. That it has bounced almost 3% in a week has been eye-catching, especially since positioning data showed yen shorts actually jumped last week.

"We're in a dollar-unfriendly environment and after a long period where it reigned supreme any turn must come with at least temporary volatility," said Societe Generale strategist Kit Juckes in a note pointing out the positioning shifts.

"Maybe it all adds up to the euro and sterling bounces running out of steam at some point, while the yen, AUD and NZD carry on for longer," he said, as shorts get squeezed.

The calendar is reasonably bare as the week heads towards the U.S. Thanksgiving holiday on Thursday. Besides the Fed minutes, U.S. housing and Canadian inflation data are due later on Tuesday, as is a speech from ECB President Christine Lagarde.

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Currency bid prices at 0000 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.0945 $1.0941 +0.04% +2.15% +1.0947 +1.0942

Dollar/Yen

148.3700 148.3200 +0.04% +13.06% +148.3750 +148.2500

Euro/Yen

162.38 162.31 +0.04% +15.74% +162.4000 +162.2300

Dollar/Swiss

0.8844 0.8850 +0.00% -4.29% +0.8847 +0.0000

Sterling/Dollar

1.2508 1.2505 +0.03% +3.44% +1.2510 +1.2505

Dollar/Canadian

1.3726 1.3725 +0.01% +1.31% +1.3726 +1.3724

Aussie/Dollar

0.6560 0.6557 +0.06% -3.75% +0.6564 +0.6551

NZ

Dollar/Dollar 0.6039 0.6038 +0.02% -4.89% +0.6041 +0.6036

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ