U.S. Dollar Approaches Three-Month High

By Kevin Buckland

TOKYO (Reuters) – The U.S. dollar traded close to a three-month high against major peers on Thursday, buoyed by expectations of a slower pace of interest rate cuts by the Federal Reserve and increasing bets on a possible second presidency for Donald Trump.

The dollar index, which measures the currency against six rivals, including the euro and yen, stood at 104.38 as of 0115 GMT, near its overnight high of 104.57, a level not seen since July 30.

Robust macroeconomic indicators and hawkish comments from Fed officials have lessened bets on monetary easing for the rest of the year. According to CME Group's FedWatch Tool, expectations for 50-basis-point rate cuts over the remaining two meetings of 2024 dropped to about 65% from around 70% the day before, down from approximately 85% a week prior.

This week, Kansas City Fed President Jeffrey Schmid expressed a preference to "avoid outsized moves," while Philadelphia Fed President Patrick Harker supported a "slow, methodical approach" to further easing.

U.S. 10-year Treasury yields responded by climbing to a three-month high of 4.26% overnight. The Japanese yen typically weakens when U.S. bond yields rise, pushing the dollar up to 153.19 yen on Wednesday, a first since July 31, before settling at 152.62 yen.

Rodrigo Catril, Senior FX Strategist at National Australia Bank, noted, "Solid economic momentum and Fed messaging emphasizing a gradual and deliberate approach to further policy easing is making the market nervous."

The dollar has surged past crucial technical resistance levels against the yen, "opening the door for higher levels," according to Catril. The dollar also gained from rising market expectations regarding a potential Trump victory next month, which could lead to inflationary policies, including tariffs.

Opinion polls suggest a close race with Democratic candidate Vice President Kamala Harris, while cryptocurrency-prediction exchange Polymarket indicates a significant rise in bets favoring a Trump win.

In Japan, recent polls hint at the coalition government possibly losing its parliamentary majority in Sunday’s election, raising political risks that could hinder the Bank of Japan's monetary tightening plans. The central bank's next policy decision is expected on Oct. 31, with a standstill anticipated.

The euro dropped to a nearly four-month low of $1.07612 overnight, hovering at $1.07845.

Traders have increased bets for faster and potentially larger rate cuts from the European Central Bank following warnings from policymakers about the risk of falling short of the bank's 2% inflation target. This marks a significant shift from their two-year campaign to control prices. On Wednesday, ECB President Christine Lagarde advised a "cautious" approach in policy decisions, while Mario Centeno hinted at the possibility of a 50 basis point cut at the next monetary authority meeting on Dec. 12.