SINGAPORE: The US dollar clung to a two-and-half-month high on Tuesday on expectations the Federal Reserve will take a measured approach to interest rate cuts, while a close battle in the upcoming US election kept investors on edge.
The dollar’s strength, boosted by rising Treasury yields, kept the pressure on the yen, euro and sterling - a theme that has been building over the past few weeks as data showed the US economy remained in a good place, resulting in traders scaling back their bets of large and rapid rate cuts from the Fed.
Four Federal Reserve policymakers expressed support on Monday for further rate cuts, but appeared to differ on how fast or far they believe any cuts should go.
The diverging views provided a taste of what might be expected at the Fed’s upcoming policy meeting on Nov. 6-7.
Markets are pricing in an 89% chance of the Fed cutting rates by 25 basis points (bps) next month, versus a 50% chance a month earlier, when investors saw an equal likelihood of a larger 50 bps cut, the CME FedWatch tool showed.
Traders are anticipating overall a 41 bps of easing for the rest of the year, with the Fed having kicked off its rate-cut cycle with a 50 bps cut in September.
“We think consecutive 25 bp cuts are quite likely in November and December, but we see more uncertainty about the pace next year,” Goldman Sachs analysts said in a note.
“In part because of the election and in part because if the growth data remain strong and the unemployment rate remains stable for a few months, the FOMC could consider slowing the pace at some point.”
The dollar index which measures the US currency versus six rivals was last at 103.96 in Asian hours, having touched its highest level of 104.02 since Aug. 1 on Monday.
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The index is on course for an over 3% gain in the month.
The euro last bought $1.081725, wallowing near its lowest level since Aug. 2, while sterling was at $1.2982, hovering around its lowest level since Aug. 20.
Election in focus
With the US election just two weeks away, the rising odds of former President Donald Trump winning the Nov. 5 election are boosting the dollar, since his proposed tariff and tax policies are seen as likely to keep US interest rates high.
The election, though, remains tight and too close to call and analysts expect volatility as investors position in the run-up to the results.
“Under a Trump win, we can expect a somewhat tumultuous environment with a lot of uncertainty,” strategists at PineBridge Investments said in a note.
“While a Trump win could be viewed as a short-term tailwind for markets, the picture looks quite different over the longer term in some ways, we view a Harris win as a ‘status quo’ outcome that would likely continue existing policies and entail a slower-moving process for policy shifts.”
The yield on the benchmark US 10-year Treasury note rose to a 12-week high of 4.198% on Monday. It was at 4.18% in Asian hours.
The rising yields weighed on the yen, which is extremely sensitive to moves in Treasuries. The yen on Tuesday was at 150.57 per dollar, hovering close to the two-and-half-month low of 150.88.
The focus will be on Japan’s general election on Sunday, Oct. 27.
While opinion polls vary on how many seats the ruling Liberal Democratic Party (LDP) will win, markets have been optimistic that the LDP, along with junior coalition partner Komeito, will prevail.
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