The US dollar has surged to a two-month high as traders adjust their expectations for the Federal Reserve’s rate cuts, following stronger-than-expected economic data. Meanwhile, the yen has dropped to a three-month low due to rising US Treasury yields, with upcoming political events in both the US and Japan likely to influence market trends further.
The US dollar remained firm on Wednesday, climbing to its highest level in more than two months.
Market participants have adjusted their outlook on the Federal Reserve, now expecting a more gradual reduction in interest rates.
This shift follows stronger-than-expected economic data, prompting traders to reconsider the likelihood of aggressive rate cuts.
The yen has faced significant pressure, falling to a three-month low of 151.72 against the dollar. This decline has been driven by rising US Treasury yields, with the 10-year note reaching 4.222%, its highest point since July.
Expectations of a rate cut in November have also softened, with a 91% chance now priced in for a quarter-basis-point cut, compared to a more divided view a month ago.
Although economic data releases have been relatively light, traders are closely monitoring the Federal Reserve’s Beige Book, which will offer further insights into US economic conditions.
The previous report indicated slowing growth, but recent data suggests a more optimistic picture may emerge this time. If the Beige Book delivers positive surprises, it could further support the US dollar and drive yields higher.
That said, traders remain cautious, with marginal gains in both the US dollar index and US Treasury yields, reflecting a more measured approach.
The dollar index, which measures the greenback against six major currencies, inched up by 0.11%, reaching 104.18. The index has gained over 3% this month, buoyed by the shifting expectations regarding Fed policy.
Looking ahead to the upcoming US presidential election, traders are also factoring in the possibility of a Republican victory, which is widely seen as a positive for the dollar.
A recent poll indicates Vice President Kamala Harris holds a narrow 46% to 43% lead over Donald Trump, yet markets are still largely pricing in a Trump win.
If the political landscape shifts in favour of a Harris victory, traders may start to anticipate a pullback in both the dollar and Treasury yields, given her more cautious stance on inflationary policy.
The yen could face additional weakness due to upcoming political events in Japan, where the general election on 27 October may unsettle the ruling coalition.
Concerns over the Bank of Japan’s ability to scale back monetary stimulus in the face of a weaker government add further pressure to the yen.
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