U.S. Dollar Surges to 2.5-Month High as Interest Rate Speculation and Political Uncertainty Rise
The U.S. dollar climbed to a 2.5-month peak on Wednesday as investor sentiment shifted towards a slower pace of interest rate cuts, fueled by robust economic data and the upcoming U.S. presidential election.
Yen Weakens as Dollar Strengthens and Treasury Yields Rise
The Japanese yen saw significant movement, dropping to 152 per U.S. dollar—the lowest since July 31. The rise in U.S. Treasury yields, particularly the benchmark 10-year note yield, which hit a high of 4.222%, has added pressure to the yen as the greenback continues its upward trajectory.
For three consecutive weeks, the dollar has gained, reaching 104.19, its highest since August 2. Market expectations for aggressive Federal Reserve rate cuts have softened after positive U.S. economic data. According to the CME FedWatch tool, there’s now a 91% probability of a modest quarter-basis-point cut in November, shifting from earlier predictions that were split between 50 and 25 basis points.
U.S. Presidential Election and Dollar Momentum
The approaching U.S. presidential election, with the possibility of a Republican sweep led by former President Donald Trump, has further buoyed the dollar. A Republican victory is widely seen as a bullish scenario for the greenback, potentially leading to stronger market conditions. Currently, the dollar stands at 152.08 yen, a 0.65% increase.
While market expectations lean toward a Trump win, analysts like Matt Simpson of City Index note that there’s still time for repricing. A win by Vice President Kamala Harris, who holds a slight 46% to 43% lead over Trump in a recent Reuters/Ipsos poll, could cause a temporary pullback in the dollar due to her less inflationary policy outlook.
Japan’s Political Landscape and Impact on the Yen
In Japan, a general election set for October 27 could impact the yen further. Opinion polls suggest the ruling Liberal Democratic Party may lose its majority, leading to political uncertainty that could complicate the Bank of Japan’s monetary policy efforts.
According to Marito Ueda of SBI Liquidity Market, any attempts to support the yen would likely come from the Bank of Japan taking a more hawkish stance rather than direct currency intervention.
Market Focus on Fed’s Beige Book
The release of the Fed’s Beige Book on Wednesday is expected to provide insight into the U.S. economic landscape, with most anticipating continued, albeit slower, economic growth. However, recent outperforming data suggests a possible upside surprise.
Despite marginal gains in both the U.S. dollar index and Treasury yields on Tuesday, analysts caution traders to proceed with care, especially if two-year yields drop below 4%. The dollar index was mostly flat at 104.13, up over 3% in September.
Euro and Pound Performance Amid Central Bank Moves
The euro fell to $1.08035, its lowest since August 2, as European Central Bank policymakers hinted at the risk of inflation falling below the 2% target. Meanwhile, the British pound remained stable at $1.29925 after a previous dip to $1.2945, its lowest since August 19.
Bitcoin Slips Slightly as Cryptocurrencies Face Pressure
In the cryptocurrency market, Bitcoin dropped 0.71% to $67,002.42, continuing its volatile trend as traditional markets dominate the focus.
