Written by Kevin Buckland
TOKYO (Reuters) – The U.S. dollar rose to a two-month high against its major peers on Wednesday, supported by expectations that the Federal Reserve will continue to cut interest rates and increased bets on a second term for Donald Trump.
The euro fell as the European Central Bank is expected to cut interest rates on Thursday, while the yen was tested by comments from the Bank of Japan chief.
The Australian and New Zealand dollars fell as uncertainty grew over stimulus from top trading partner China.
The – which measures the currency against the euro, yen and four other major rivals – was steady at 103.24, as of 0552 GMT, close to Monday's high of 103.61, a level not seen since Aug. 8.
Recent data showing a strong economy coupled with slower-than-expected inflation in September led market participants to reduce bets on a less aggressive US rate hike.
Traders currently have a 92% chance of a 25-point cut when the Fed next decides policy on November 7, with an 8% chance of no change, according to CME Group's (NASDAQ: ) FedWatch tool. In the past month, traders have seen more than 29% chance of a 50-point reduction in size.
Market prices are still very much in favor of a total of 50 basis points of reduction this year, but the comments of central bankers overnight lean hawkish. The Atlanta Fed's Raphael Bostic said he had penciled in a 25 basis point rate cut this year, while the San Francisco Fed's Mary Daly said a “one or two” cut in 2024 would be “reasonable”.
Meanwhile, Trump's odds of winning the election have risen in recent days on betting websites, although the outcome remains tight.
Oddschecker.com had Trump at about a 56% chance of winning and Harris at about 44% overnight. On the PredictIt platform, contracts for a Trump victory are trading at 54 cents per $1 payout. Harris contracts were 50 cents.
“Trump is starting to move forward in some betting markets, and there are concerns that his tax proposals will increase and could cause the Fed to rethink its policy approach,” said James Kniveton, senior forex trader at Convera.com.
“But we've seen these issues change quickly and frequently over the past few months.”
The dollar added 0.1% to 149.345 yen, not far from Monday's high of 149.98 yen, the strongest since Aug. 1.
BOJ board member Seiji Adachi said on Wednesday the central bank should raise rates “more moderately” and avoid premature hikes, given the uncertainty over the state of the global economy and the development of domestic wages.
The euro fell 0.05% to $1.0887, and previously touched $1.0882, matching the low since Tuesday, which was the weakest level since Aug. 8.
Sterling was lower at $1.3073.
It fell 0.51% to $0.6669, the lowest since Sept. 12, before recovering from 0.07% to $0.6699.
The New Zealand dollar fell 0.69% to $0.6041, a level last seen on Aug. 19. It ended trading 0.3% weaker at $0.60645.
Chinese shares fell sharply on Tuesday and remained weak in the latest session, following a frenetic rally fueled by hopes that Beijing will deliver.
On Saturday, China's Ministry of Finance said it would increase lending, without saying when or by how much. China will hold a press conference on Thursday to discuss the “stable and healthy” development of the construction sector.
“There has certainly been some skepticism about China's real commitment to the kind of financing that can be seen as really unreasonable,” and that weighed on Australian and New Zealand currencies this week, said Ray Attrill, head of FX Strategy at National. Australia Bank (OTC:).
New Zealand's currency was also weighed down by data showing cooling inflation, leaving the door open for central bank easing.
Statistics New Zealand said on Wednesday that annual inflation eased to 2.2% in the third quarter, returning to the RBNZ's target range of 1% to 3% for the first time since March 2021.
“There has been speculation that the next RBNZ cut could be 75 basis points,” Attrill said. “Today's CPI numbers are undoubtedly played with the grain of that view to reduce size.”
