Dollar Remains at 7-Week Highs as Traders Evaluate US Rates Outlook By Reuters

By Ankur Banerjee

SINGAPORE – The U.S. dollar held onto seven-week highs against key currencies on Tuesday as investors assessed the future of U.S. interest rates following a robust jobs report last week, which tempered expectations for significant rate cuts. Additionally, rising tensions in the Middle East have negatively impacted risk appetite.

Traders have markedly adjusted their forecasts for monetary easing by the Federal Reserve this year.

Currently, the markets are not fully anticipating a rate cut in November, with an 86% chance being assigned to a 25 basis points (bps) reduction, according to recent data. Moreover, expectations for easing by December have dropped to just 50 bps, down from over 70 bps just a week prior.

This shift has bolstered the dollar, pushing it to multi-week highs against the euro, pound, and yen. The dollar index, which tracks the U.S. currency against major rivals, recently stood at 102.41, close to the seven-week high of 102.69 reached on Friday.

The combination of a slower pace of cuts from the Fed, strong economic indicators, and the potential for a ‘no landing’ scenario has provided support for the dollar, according to Kieran Williams, head of Asia FX at InTouch Capital Markets. "While the USD has room to strengthen from here, other catalysts may be necessary given the hawkish repricing post-FOMC."

Federal Reserve Bank of St. Louis President Alberto Musalem expressed on Monday his support for more gradual interest rate cuts as the economy continues on a stable path, while emphasizing the importance of the central bank being cautious in its approach to monetary policy.

"Further gradual reductions in the policy rate will likely be appropriate over time," he noted.

Meanwhile, the benchmark interest rate remained above 4% during Asian trading hours, having reached this level on Monday for the first time in two months as traders reduced their expectations for significant rate cuts.

Investor attention this week will shift to an inflation report due on Thursday and the minutes from the Federal Reserve’s September meeting, scheduled for release on Wednesday. Additionally, Chinese markets are set to resume trading after a week-long holiday break.

In early trading, the Chinese yuan strengthened slightly to 7.0594 per dollar. The euro was trading at $1.098175, near its seven-week low of $1.09515 from last week, while the pound was at $1.3095, close to the three-week low of $1.30595 reached on Monday.

The yen also saw a minor increase, trading at 147.795 per dollar after hitting a seven-week low of 149.10 on Monday, as traders evaluated the anticipated path of interest rates from the Bank of Japan.

New Prime Minister Shigeru Ishiba’s recent comments surprised the market when he stated that the economy was not ready for additional rate hikes, marking a clear departure from his past support of unwinding the Bank of Japan’s long-standing monetary stimulus measures.

These remarks led to a decline in the yen’s value and raised questions about the aggressiveness of the Bank of Japan’s future rate increases.

In other currency movements, the Australian dollar rose slightly to $0.6768, while the New Zealand dollar gained 0.3%, reaching $0.6144 ahead of the monetary policy decision expected on Wednesday. A majority of economists surveyed have predicted that the Reserve Bank of New Zealand will implement a 50 basis point cut.