U.S. Dollar Strengthens Amid Fed Rate Cut Expectations and Election Uncertainty

U.S. Dollar Hits 2.5-Month High

On Tuesday, the U.S. dollar maintained its position at a 2.5-month high due to expectations that the Federal Reserve will adopt a cautious approach to interest rate cuts. The upcoming U.S. election is also contributing to market volatility, keeping investors on edge.

Factors Influencing the Dollar's Strength

The dollar's strength is bolstered by rising Treasury yields, which have pressured the yen, euro, and sterling. Recent data indicates that the U.S. economy remains robust, leading traders to scale back predictions of significant and rapid rate cuts from the Fed. While four Federal Reserve policymakers voiced support for further rate cuts on Monday, they exhibited differing opinions on the pace and extent of these cuts, setting the stage for the Fed's upcoming policy meeting on November 6-7.

Markets are pricing in an 89% likelihood of a 25 basis points cut next month, compared to a mere 50% a month prior, as indicated by the CME FedWatch tool. Overall, traders anticipate 41 basis points of easing for the rest of the year, following a 50 basis points cut initiated by the Fed in September.

Election's Impact on the Dollar

With the U.S. election just two weeks away, growing odds of former President Donald Trump’s victory are further strengthening the dollar. His proposed tariff and tax policies are expected to maintain elevated U.S. interest rates. However, the election remains highly competitive, and analysts predict increased volatility as investors prepare for the outcome.

As the dollar index approaches 104.02, the euro trades at approximately $1.08205, nearing its lowest point since early August. Meanwhile, the yen recently hit a near three-month low of 151.10 per dollar, exacerbated by rising U.S. Treasury yields.

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