The U.S. dollar traded near a three-month high against major peers on Thursday, buoyed by expectations for a slower pace of interest rate cuts from the Federal Reserve and increasing bets on a potential second term for Donald Trump. The dollar index, which measures the currency against six rivals, including the euro and yen, was at 104.38, close to the overnight high of 104.57, a level last seen on July 30.
Recent robust economic indicators and hawkish comments from Fed officials have tempered expectations for monetary easing for the remainder of the year, according to CME Group's FedWatch Tool. The likelihood of 50-basis-point rate cuts in the remaining two meetings of 2024 dropped to about 65% from 70% the day before and 85% a week ago. This week, Kansas City Fed President Jeffrey Schmid stated he would prefer to "avoid outsized moves," while Philadelphia Fed President Patrick Harker supported a "slow, methodical approach" to further easing.
In response, U.S. 10-year Treasury yields have risen, reaching a three-month high of 4.26%. The Japanese yen tends to weaken when U.S. bond yields climb, leading the dollar to rise as high as 153.19 yen on Wednesday for the first time since July 31. The pair last traded at 152.62 yen. "Solid economic momentum and Fed messaging emphasizing a gradual approach to policy easing are making the market nervous," said Rodrigo Catril, senior FX strategist at National Australia Bank.
The dollar has also benefited from rising market expectations for a victory by Republican candidate and former President Trump next month, which could lead to inflationary policies such as tariffs. Although opinion polls indicate a tight race with Democratic rival, Vice President Kamala Harris, the cryptocurrency-prediction exchange Polymarket has seen a surge in bets for a Trump win.
In Japan, recent polls suggest the possibility of the coalition government losing its majority in Sunday’s election, complicating the Bank of Japan’s plans for monetary tightening. The central bank’s next policy decision is due on October 31, and it is widely expected to maintain its current stance.
The euro fell to a nearly four-month low of $1.07612 overnight, last changing hands at $1.07845. Traders have increased bets on faster and potentially larger rate cuts from the European Central Bank after multiple policymakers warned about the risk of missing the central bank’s 2% inflation target. On Wednesday, ECB President Christine Lagarde advocated for caution in policy decisions, while colleague Mario Centeno suggested rates might be cut by 50 basis points at the next meeting on December 12.
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The U.S. dollar stands tall as expectations for slower Fed cuts grow alongside potential Trump victory. Explore the latest economic indicators and market impacts.
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