Dollar Falters as Markets Eye Fed Updates; RBA Decision Looms

TOKYO (Reuters) - The U.S. dollar continued to weaken on Tuesday, extending its decline against the euro and sterling as concerns over a potential far-right French government eased. Despite a rise in Treasury yields overnight, the dollar struggled to gain traction with investors focusing on upcoming U.S. retail sales data and remarks from Federal Reserve officials to assess the future course of interest rate adjustments.

The Australian dollar remained relatively stable, situated near the midpoint of its trading range from the past month, as the Reserve Bank of Australia (RBA) was anticipated to maintain its current interest rate later in the day.

In early Asian trading hours, the U.S. dollar index, which measures the dollar against a basket of six major currencies including the euro and sterling, inched down to 105.26, continuing its decline from Friday's 1 1/2-month peak of 105.80. The recent rally in the index was largely driven by a significant selloff in the euro following French President Emmanuel Macron's unexpected call for a snap election. This move came after his centrist party faced a substantial defeat by Marine Le Pen's eurosceptic National Rally in the European Parliament elections.

"Markets are increasingly expecting a hung parliament, and many believe that even if Le Pen's RN party joins the government, they will likely avoid major fiscal disruptions," said Chris Weston, head of research at Pepperstone. "Le Pen aims to win the Presidential election in 2027, which requires gaining the bond market's respect."

The euro edged up 0.04% to $1.0738, adding to a 0.26% rise from the previous session, while sterling increased 0.06% to $1.2712. The dollar remained steady against the yen at 157.66.

The U.S. dollar has been under mixed pressures, with moderate U.S. inflation readings contrasting with the generally hawkish tone from Fed officials at last week's policy meeting. The Fed reduced its median forecast for three quarter-point rate cuts this year to just one.

Philadelphia Fed President Patrick Harker stated on Monday that he supports a single rate cut but remains open to changing his stance based on upcoming data. A series of Fed officials, including Boston Fed's Susan Collins and Richmond Fed's Thomas Barkin, are scheduled to speak later in the day.

Ahead of these events, the RBA is broadly expected to keep interest rates unchanged for the fifth consecutive meeting. Most economists in a Reuters poll predict the first rate cut will occur in the fourth quarter.

"Financial markets are not expecting any changes to the RBA's cash rate today, and we concur," said Commonwealth Bank of Australia economist Kristina Clifton in a note. "Unless there's a significant shift in the post-meeting statement, we foresee no substantial impact on the AUD."

The Australian dollar gained 0.08% to $0.66175, while the New Zealand dollar also rose 0.08% to $0.6136.