The US Dollar held on to a 2.5-month high on Tuesday amid expectations that the Federal Reserve will adopt a cautious approach to interest rate cuts, while uncertainty surrounding the upcoming US election kept investors on alert.
The Dollar's strength, supported by rising Treasury yields, exerted pressure on the Yen, Euro, and Sterling, a trend that has been developing over the past few weeks, as data indicated that the US economy remains robust, prompting traders to reduce their expectations for significant and swift rate cuts from the Fed.
Four Federal Reserve policymakers voiced their support for additional rate cuts on Monday, but they differed on the pace and extent of those cuts.
These varying opinions hinted at the discussions likely to take place during the Fed's upcoming policy meeting on 6-7 November, Reuters reports.
Markets are currently pricing in an 89% probability that the Fed will cut rates by 25 basis points (bps) next month, up from a 50% chance a month earlier, when investors viewed a larger 50 bps cut as equally likely, according to the CME FedWatch tool.
Traders are expecting a total of 41 bps of easing for the remainder of the year, following the Fed's initiation of its rate-cutting cycle with a 50-bps reduction in September.
“The market’s aggressive Fed rate cut expectations have been questioned in the last few weeks with the US exceptionalism story remaining intact and what Fed speakers hinting are gradual rate cuts from here,” said Charu Chanana, chief investment strategist at Saxo.
“This, together, with the betting odds of a Trump 2.0 picking up has brought another leg of gains for the US Dollar.”
The Dollar index, which tracks the greenback against six major rivals, stood at 103.93 at the time of writing, after hitting 104.02 on Monday, its highest since 1st August.
The index is on track for an increase of more than 3% this month.
The Euro was last trading at $1.08205, close to its lowest level since 2nd August, whilst Sterling stood at $1.3006, near its lowest point since 20th August.