Dollar at two-and-half-month high on US rate policy

by Jonathan Adams
Dollar wobbles

Markets are pricing in an 89% probability of the Fed cutting rates by 25 bps next month, versus a 50% probability a month earlier, when investors saw an equal probability of a bigger 50 basis point cut, according to the CME FedWatch tool

The U.S. dollar clung to a two-and-half-month high on Tuesday on expectations the Fed will take a measured approach to interest rate cuts, while a close battle in the upcoming U.S. election kept investors on edge.

The dollar’s strength, boosted by rising Treasury yields, kept the pressure on the yen, euro and sterling – a theme that has been building over the last few weeks as data showed the U.S. economy remained in a good place, resulting in traders scaling back their bets of big and rapid rate cuts from the Fed.

Four Fed policymakers expressed support on Monday for further rate cuts, but seemed to differ on how fast or far they believe any cuts should go.

The diverging views provided a hint of what might be expected at the Fed’s upcoming policy meeting on November 6-7.

Markets are pricing in an 89% probability of the Fed cutting rates by 25 bps next month, versus a 50% probability a month earlier, when investors saw an equal probability of a bigger 50 basis point cut, according to the CME FedWatch tool.

Traders are anticipating overall a 41 basis point of easing for the rest of the year, with the Fed having started its rate-cut cycle with a 50 basis point cut in September.

We think consecutive 25 basis point cuts are quite likely 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 remain strong and the unemployment rate remains stable for a few months, the FOMC could consider slowing the pace at some point, the analysts said.

The dollar index which measures the U.S. currency versus six peers was last at 103.96 in Asian hours, having hit its highest level of 104.02 since August 1 on Monday. The index is on course for an over 3% gain in the month.

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