Written by Ankur Banerjee
SINGAPORE (Reuters) – The U.S. dollar held on to a two-and-a-half-month high on Tuesday as the Federal Reserve is expected to take a more measured approach to interest rate cuts, while the looming battle over the upcoming U.S. election kept investors on edge.
The dollar's strength, boosted by a rise in Treasury yields, kept pressure on the yen, euro and sterling – a theme that has been building over the past few weeks as data shows the US economy remains in good shape, leading traders to downgrade their outlook. betting on big and fast rate cuts from the Fed.
Four Federal Reserve policymakers expressed support Monday for cutting rates, but appeared to differ on how fast or far they believed any cuts should go.
The mixed views provided a taste of what to expect at the Fed's upcoming policy meeting on November 6-7.
Markets are pricing in an 89% chance of the Fed cutting rates by 25 basis points (bps) next month, compared with a 50% chance last month, when investors saw an equal chance of a big cut of 50 bps, the instrument CME FedWatch showed. .
Traders expect 41 bps of easing for the rest of the year, with the Fed kicking off its rate-cutting cycle with a 50 bps cut in September.
“We think it is possible to cut 25 bp respectively in November and December, but we see more uncertainty about the pace next year,” Goldman Sachs analysts said in a note.
“In part because of the election and in part because if the growth data remains strong and the unemployment rate remains stable for several months, the FOMC could consider reducing the pace at some point.”
The US dollar's benchmark against six rivals ended at 103.96 in Asian hours, touching its highest level of 104.02 since Aug. 1 on Monday. The index is on track to gain more than 3% per month.
The euro last bought $1.081725, hovering near its lowest level since Aug. 2, while sterling was at $1.2982, hovering around its lowest level since Aug. 20.
THE ELECTION IS ON
With the US election just two weeks away, the growing likelihood of former President Donald Trump winning the November 5 election is boosting the dollar, as his tax rates and proposed tax policies appear likely to keep US interest rates high.
The election, however, is too tight and too close to call and analysts expect volatility as investors wait for the results.
“Under a Trump win, we can expect a turbulent environment with a lot of uncertainty,” strategists at PineBridge Investments said in a paper.
“While Trump's win may be seen as a short-term effect on the markets, the picture looks very different in the long-term… in a way, we see Harris' win as a result of the 'status quo' that is likely to continue. policies and involves a slow process of policy change.”
The yield on the benchmark US 10-year Treasury rose to a 12-week high of 4.198% on Monday. It was up 4.18% in Asian hours.
Rising yields weighed on the yen, which is highly sensitive to moves in Treasuries. The yen on Tuesday was at 150.57 per dollar, hovering near a two-and-a-half-month low of 150.88.
Much of the focus will be on Japan's general election on Sunday, October 27. Although opinion polls differ on how many seats the ruling Liberal Democratic Party (LDP) will win, markets have been optimistic that the LDP, along with its junior coalition partner Komeito, will win. overcome.
