* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Sept 17 (Reuters) - The dollar firmed within sight of a recent two-year high on Tuesday on the back of ongoing geopolitical risks in the Middle East with investors looking forward to an interest rate cut by the U.S. central bank on Wednesday.
Though a 25 basis points rate cut is firmly baked into market expectations, some market watchers believe this may be the last rate cut for a while until there is more evidence of a U.S. economic slowdown which might encourage dollar bulls.
“If the Fed does cut 25 bps, then we think it will be the last time until we really do see signs of recession,” Brown Brothers Harriman strategists said in a note.
Money markets are pricing in about an 80% probability of another U.S. rate cut by the end of the year.
Against a basket of its rivals, the greenback edged 0.1% higher at 98.744, heading towards a May 2017 high of 99.37 hit earlier this month.
Geopolitical tensions also boosted demand for the dollar.
Though oil prices pulled back slightly after surging to four-month highs on Monday, they remained about 15% higher than Friday’s close as markets remain wary over the threat of a military response to attacks on Saudi Arabian crude oil facilities.
While U.S. President Donald Trump said on Monday he did not want to go to war, he said the United States was still investigating if Iran was behind the Saudi strikes.
Investors were also watching anxiously an overnight spike in dollar funding costs.
The overnight rate in the repurchase agreement (repo) market jumped to 4.10% from 2.29% late on Friday, its highest levels since the start of the year.
Analysts attributed the rise to quarterly federal tax payments and supplies. “The combination of decent U.S. data, rising geopolitical tensions, and now this latest flare-up in USD funding conditions creates an untradeable concoction of factors for various FX pairs,” said Stephen Gallo, European head of FX strategy.
The Swedish crown and the Australian dollar led losers against the greenback after their respective central banks flagged a dovish bias in their latest policy meeting minutes.
The crown was down 0.8% versus the euro at a one-week low of 10.7 crowns and had fallen 0.6% to the dollar at 9.72.
On Sept. 5, the Riksbank held the repo rate unchanged at -0.25% and said it still expected to raise rates in coming months, a view many analysts saw as over-optimistic.
The minutes showed the six rate-setters unanimous about the decision but cautious about the rate hike path.
The Australian dollar also fell 0.5% after the Reserve Bank of Australia flagged an easing bias in meeting minutes.
Reporting by Saikat Chatterjee; Editing by Ed Osmond