The U.S. dollar surged to a two-month high against major currencies on Tuesday as traders adjusted their expectations for a cautious approach to interest rate cuts by the Federal Reserve. The dollar’s strength has pushed the yen closer to the key 150 per dollar level, while the euro remains under pressure.
Ahead of the upcoming European Central Bank meeting on Thursday, the euro continues to trade near its lowest level since early August. The central bank is expected to announce another interest rate cut, which has contributed to the euro’s weakness.
Recent U.S. economic data shows that the economy remains resilient, with only modest signs of slowing. Inflation in September rose slightly more than expected, leading traders to revise their outlook on the pace of Federal Reserve rate cuts. While the U.S. central bank made a significant 50 basis point cut in September, the market now anticipates a slower pace of reductions.
Traders are currently estimating an 89% chance of a 25 basis point rate cut in November, with a total of 45 basis points of easing expected by the end of the year. This shift in expectations has provided strong support for the dollar. The U.S. dollar index, which tracks the currency against six major peers, was at 103.27, just below Monday’s high of 103.36, which was the highest since August 8. The index is up 2.5% this month, ending its three-month losing streak.
Federal Reserve Governor Christopher Waller emphasized caution on interest rate reductions, citing the strength of recent economic data. He noted that while gradual rate cuts are expected over the next year, the central bank would proceed carefully to avoid economic disruption.
The upcoming non-farm payrolls data, due in early November, may show a distorted picture of the job market due to recent hurricanes and the Boeing strike. These events could reduce job gains by over 100,000, according to Waller’s estimates.
The dollar’s rise has pressured the yen, following dovish comments from Bank of Japan Governor Kazuo Ueda and new Prime Minister Shigeru Ishiba, both signaling opposition to further rate hikes. This has cast doubt on when Japan’s central bank will next tighten policy, with a slim majority of economists in a recent poll expecting no further rate hikes this year.
The yen traded at 149.72 per dollar, after slipping to 149.98 on Monday, its weakest level since August 1. The yen has fallen by 4% this month, having been below 140 per dollar just a month ago.
Meanwhile, the Australian dollar dropped 0.19% to $0.67135, and the New Zealand dollar fell 0.22% to $0.60835. The euro declined 0.15% to $1.0892. In China, the yuan weakened to a one-month low against the dollar.
In the UK, the British pound last traded at $1.30525 ahead of wage data that could influence the Bank of England’s next policy decision. Despite earlier expectations of gradual rate cuts supporting the pound, it has dropped more than 2% this month amid shifting market sentiment.
