On October 22, the U.S. dollar surged to a fresh 2.5-month high, continuing its upward trajectory as expectations mount that the Federal Reserve will proceed cautiously with interest rate cuts. Investors are also positioning themselves ahead of what appears to be a tightly contested presidential election.
The dollar has experienced gains for three consecutive weeks and is on track for its 15th increase in 17 sessions. This rise is attributed to a series of positive economic data that have tempered expectations regarding the size and speed of potential rate cuts by the Fed, contributing to higher U.S. Treasury yields.
The yield on the benchmark 10-year U.S. Treasury note reached 4.222% on Tuesday, marking its highest level since July 26. Current market expectations indicate an 89.6% chance of a 25 basis point cut at the Fed's November meeting, with a 10.4% chance of rates being held steady. A month ago, the market was fully pricing in at least a 25 basis point cut, with a 50.4% chance of a 50 basis point reduction.
"If the https://www.federalreserve.gov/ had not been strong, especially in comparison to global indicators, we would not see this divergence between the Fed's direction and that of other central banks," remarked Thierry Wizman, global FX and rates strategist at Macquarie in New York. "This is a key driver of the dollar high."
The dollar index, which measures the currency against a basket of others including the euro and Japanese yen, rose 0.12% to 104.08, after peaking at 104.10—its highest since August 2. The index is up about 3.3% this month, on track for its strongest monthly performance since April 2022.
The British pound edged down to $1.2979, a decline of 0.04%. Meanwhile, the upcoming U.S. presidential election continues to shape currency movements, as market sentiment increasingly favors a potential victory for Donald Trump. This could lead to inflationary policies such as tariffs.
"As Trump's election prospects improve, the market begins to anticipate higher inflation in the U.S., given that his policy agenda is generally linked with increased inflation compared to that of Democratic candidate Kamala Harris," noted Wizman.
The euro fell 0.15% to $1.0798. Officials from the European Central Bank warned about the risks of inflation dropping below the central bank's 2% target, indicating a shift in focus after years of elevated price growth.
Against the Japanese yen, the dollar rose 0.17% to 151.08, reaching a high of 151.19, the strongest since July 31. The Bank of Japan is monitoring the risks from rising import prices as the yen weakens. With Japan's general election set for October 27, recent polls suggest the ruling coalition may lose its majority, raising concerns about potential complications for the Bank of Japan as it seeks to gradually unwind years of monetary stimulus.
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The Dollar High continues as the U.S. dollar reaches a 2.5-month peak amid interest rate cut speculation from the Fed and Trump's election
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