Dollar Steady Near Two-Month High as Markets Analyze Fed Outlook

The dollar steady remained steady, hovering near its highest level in over two-month high against major currencies. This stability is driven by expectations that the Fed outlook will implement modest rate cuts in the near future.

Economic Factors Supporting Dollar Steady

Recent U.S. economic data indicates resilience, with September's inflation slightly exceeding forecasts. This led traders to reduce their bets on significant rate cuts by the Fed. The central bank initiated its easing cycle with an aggressive 50 basis point cut in September, but market sentiments have shifted toward a more gradual approach, strengthening the dollar's position.

Traders are currently assigning an 89% probability to a 25 basis point cut in November, with an overall expectation of 45 basis points of easing for the year. The dollar index, which gauges the U.S. currency against six rivals, was at 103.19, just below Monday’s peak of 103.36—the highest since August 8. This rise followed comments from influential Fed Governor Chris Waller, who advocated for "more caution" regarding interest rate cuts.

"Waller's statements have been crucial in driving the dollar's rebound, particularly in comparison to other central banks," noted Francesco Pesole, an FX strategist at ING.

Currency Performance Amid Dollar Steady

The euro struggled, falling to $1.0885, its lowest since August 8, ahead of the European Central Bank's policy meeting on Thursday. Analysts expect the ECB to announce another interest rate cut, a scenario that seemed unlikely in September.

The British pound traded at $1.3075, pressured by labor market data showing the slowest wage growth in over two years. This trend suggests that the Bank of England may consider lowering rates next month. Expectations of persistent inflation had initially supported the pound's strength against its peers, but shifting market dynamics have resulted in a decline of over 2% for the pound against the dollar this month.

"Today's labor market data highlights the slowing wage growth as a key takeaway," said Jefferies economist Modupe Adegbembo, who anticipates a quarter-point cut next month.

Yen Weakness Moderates Despite Dollar Steady

The U.S. dollar's rise has brought the yen close to 150 per dollar, influenced by a dovish shift from Bank of Japan Governor Kazuo Ueda and unexpected resistance to further rate hikes from new Prime Minister Shigeru Ishiba. This has raised questions about the timing of the next tightening in Japan's monetary policy, with a slim majority of economists in a Reuters poll predicting no rate increases this year. However, the yen showed slight strength in early European trading at 149.07 per dollar, having dipped to a low of 149.98 on Monday, its weakest since August 1. The yen has decreased by 3.7% this month.

Impact on Commodity Currencies

Oil-exporting currencies weakened following a drop in crude oil prices, attributed to reports that Israel would not target Iranian oil facilities, alleviating supply disruption concerns in the Middle East. The Norwegian krone fell about 0.4% against both the euro and dollar, while the Canadian dollar dropped by 0.1%.

Meanwhile, the Australian dollar decreased by 0.2% to $0.6710, and the New Zealand dollar eased by 0.2% to $0.6083. China's yuan, both onshore and offshore, weakened to a one-month low against the dollar on Tuesday.

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