* Dollar undermined by easing Fed rate hike expectations
By Hideyuki Sano
TOKYO, Aug 2 (Reuters) - The dollar hovered near three-week lows on Tuesday after soft U.S. economic data undermined the case for an early Federal Reserve rate hike while the Australian dollar braced for the probability of a policy easing later in the day.
The dollar index against a basket of six major currencies .DXY =USD stood at 95.758, having fallen to as low as 95.384 last week when it posted its biggest fall in three months.
The index has struggled to stage a meaningful recovery since after the release of very weak U.S. gross domestic product growth for the June quarter late last week.
Weaker-than-expected manufacturing data released on Monday continued to hold the greenback down. The influential Institute for Supply Management's (ISM) index of national factory activity dropped to 52.6 in July from 53.2 in June, below market expectations of 53.0. funds futures are pricing in less than a 40 percent chance of an interest rate hike by December.
Against the yen, the dollar JPY= changed hands at 102.40 yen, near its three-week low hit on Friday after the Bank of Japan disappointed markets with a less aggressive than expected easing.
Japanese Prime Minister Shinzo Abe is also due to formerly unveil his economic package on Tuesday, which is expected to include 7.5 trillion yen of fiscal spending, though this is not expected to affect the yen much. size and rough contents of the package are already known so I doubt it will move markets. The dollar/yen is likely to fall unless there are clearer signs of a rate hike by the Fed," said Shinichiro Kadota, senior FX and rates strategist at Barclays (LON:BARC) Securities Japan.
The euro EUR= traded at $1.1165, having moved little so far this week.
Meanwhile, the Australian dollar AUD=D4 was on hold as traders looked to a policy announcement from the Reserve Bank of Australia at 0430 GMT, which is expected to cut interest rates to a new low.
Local interbank futures 0#YIB: put the probability of a 25 basis point cut at around 60 percent.
While expectations of a rate cut have dented the Aussie dollar, the currency remains relatively well-supported due in part to its still relatively high yield among its developed market peers.
The Aussie 10-year bonds yield stood just above 1.8 percent AU10YT=RR , compared with 1.5 percent for its U.S. counterpart US10YT=RR and below zero percent in Japan JP10YTN=JBTC and Germany DE10YT=TWEB .
(Editing by Sam Holmes)