By Ankur Banerjee and Stefano Rebaudo
(Reuters) – The U.S. dollar settled at a 2.5-month high on Tuesday on expectations the Federal Reserve will take a measured approach to rate cuts, while a too-close U.S. election campaign kept investors on edge. .
The dollar’s strength, boosted by rising government bond yields, kept pressure on the yen, euro and sterling, a theme that has been gaining momentum in recent weeks as traders scale back bets on quick US rate cuts.
Some analysts argued that the release of the Beige Book late on Wednesday could be the biggest threat to the dollar this week, with the earlier summary of economic conditions seen by some as the main trigger for the 50 basis point rate cut in September, which signaled the start of the interest rate cut. The Fed’s easing cycle.
Four Fed policymakers expressed support for further rate cuts on Monday, but appeared to differ on how quickly or far they think any cuts should go.
Markets are pricing in an 87% chance that the Fed will cut rates by 25 basis points (bps) next month, compared to a 50% chance a month earlier, when investors saw an equal probability of a larger 50 bps cut, according to the report. was evident from the CME FedWatch tool. .
Traders expect a total of another 40 basis points of easing for the rest of the year.
“The narrative of American exceptionalism remains intact and what Fed speakers are hinting at is gradual rate cuts from now on,” said Charu Chanana, chief investment strategist at Saxo. “This, together with the gambling opportunities of a strengthening Trump 2.0, has delivered renewed gains for the US dollar.”
The , which measures the U.S. currency against six others, was last at 103.87 and hit 104.02 on Monday, its highest level since Aug. 1. The index is up more than 3% so far this month.
The euro last bought at $1.0827, near its lowest since August 2, while the pound was at $1.3006, near its lowest since August 20.
Eurozone PMI data could put additional downward pressure on the single currency on Thursday as it underlines the poor economic situation in the eurozone and raises expectations of future rate cuts from the European Central Bank.
ECB speakers will also take center stage after President Christine Lagarde issued a forgiving message last week.
“The key question is: are the hawks okay with Lagarde’s optimistic disinflation view, a gradual shift in focus to growth and such moderate market pricing?” said forex strategist Francesco Pesole at ING.
“Given some ongoing service sector inflation in the eurozone, the answer is probably no.”
ELECTION IN FOCUS
With the US election just two weeks away, increasing chances of former President Donald Trump winning are boosting the dollar as his proposed tariff and tax policies are believed to keep US interest rates high.
However, the election remains too close and analysts expect volatility as investors position themselves ahead of the results.
“Even small changes in tight polls can cause seemingly erratic swings in market sentiment,” said Antti Ilvonen, forex analyst at Danske Bank.
He noted that according to Polymarket – a decentralized prediction market platform – the former president is now the clear favorite, with a more than 20 percent lead over Kamala Harris, while polls indicate a much tighter race.
The yield on the US 10-year government bond rose to the highest level since July 26, at 4.22%.
That weighed on the yen, which was roughly unchanged at 150.82 after hitting a near three-month low of 151.10 per dollar.
The Bank of Japan is carefully watching the upside risks of rising import prices as the yen weakens, Executive Director Takeshi Kato told Jiji Press on Tuesday.
The yen’s weakness comes as Japan is set to hold general elections on October 27. While opinion polls vary on how many seats the ruling Liberal Democratic Party (LDP) will win, markets are optimistic that the LDP, along with junior coalition partner Komeito, will prevail.
