Dollar Holds Firm Near Seven-Week High Amid U.S. Rate Outlook and Rising Middle East Tensions
The U.S. dollar remains strong, hovering near seven-week highs against major global currencies. This comes as investors reassess the Federal Reserve’s interest rate outlook following last week’s strong U.S. jobs report, which dampened expectations for large rate cuts. At the same time, escalating tensions in the Middle East have further boosted demand for safe-haven assets like the dollar.
Changing Expectations for Federal Reserve Rate Cuts
Investor sentiment has shifted significantly, with traders scaling back their bets on aggressive rate cuts from the Federal Reserve this year. According to the CME FedWatch Tool, markets no longer fully price in a rate cut in November, now predicting an 86% chance of a 25 basis point reduction. Expectations for December have also eased, with just 50 basis points of cuts forecasted, down from over 70 basis points a week earlier.
This hawkish sentiment has propelled the U.S. dollar higher, particularly against the euro, British pound, and Japanese yen. The dollar index, which tracks the greenback against a basket of major currencies, was last at 102.38, slightly below the seven-week high of 102.69 reached last Friday.
Strong U.S. Data and “No Landing” Scenario Boost Dollar
The dollar’s strength is supported by solid economic data and a potential “no landing” scenario, where the labor market remains robust even as inflation eases. Kieran Williams, head of Asia FX at InTouch Capital Markets, notes that while the U.S. dollar has room to strengthen further, additional catalysts will be needed beyond the recent Federal Reserve policy shift.
St. Louis Fed President Alberto Musalem recently voiced support for further rate cuts but emphasized the need for caution, stating the economy remains on a healthy path. As a result, the benchmark 10-year U.S. Treasury yield has stayed above 4%, reflecting reduced expectations for large-scale monetary easing.
Key Focus: U.S. Inflation Data and Fed Minutes
Looking ahead, investor attention will turn to U.S. inflation data due on Thursday and the minutes from the Federal Reserve’s September meeting, which will be released on Wednesday. Analysts like Steve Boothe from T. Rowe Price suggest that the Fed may implement two more 25 basis point cuts this year, leading to a total of six rate cuts by next year.
Impact of Geopolitical Tensions and Global Currencies
Meanwhile, geopolitical tensions in the Middle East are bolstering safe-haven flows into the yen, allowing it to recover slightly from recent lows. On Monday, the yen fell to 149.10 per dollar, a seven-week low, before clawing back some losses to trade at 148.07 on Tuesday. The decline came after new Japanese Prime Minister Shigeru Ishiba surprised markets with comments indicating the economy is not yet ready for further rate hikes by the Bank of Japan (BOJ).
In other currencies, the euro is trading near a seven-week low at $1.09865, while the British pound is close to a three-week low at $1.3094. The Australian dollar also slid to its lowest level since mid-September, weighed down by dovish signals from the Reserve Bank of Australia and waning optimism in Chinese equity markets. The Aussie was last down 0.24% at $0.6742, while the New Zealand dollar remained flat at $0.6127, with attention turning to the Reserve Bank of New Zealand’s policy decision on Wednesday.
Conclusion: Dollar Set to Stay Strong as Rate Expectations Shift
With expectations for aggressive rate cuts easing and geopolitical tensions rising, the U.S. dollar looks poised to remain firm in the near term. Traders and investors will closely monitor upcoming inflation data and Federal Reserve minutes for further clues on the U.S. interest rate trajectory.
