Market Analysis

The U.S. dollar reached a 10-week high against the yen on Thursday as market sentiment grew more optimistic about the Federal Reserve's cautious stance on additional monetary easing, despite a key inflation report expected later in the day.

The dollar index, which tracks the currency against six major rivals, including the yen, remained close to a two-month peak reached overnight, as traders reduced their expectations for U.S. rate cuts this year following last week's surprisingly strong payroll data.

The dollar climbed to 149.54 yen for the first time since August 2, although it later dipped 0.1% to 149.11 yen. Meanwhile, the euro hovered near its lowest level since August 13 against the dollar, remaining flat at $1.0935.

Economists surveyed by Reuters expect September's consumer price index (CPI), set to be released at 1230 GMT, to show core U.S. inflation steady at a year-on-year rate of 3.2%.

Minutes from the Fed's most recent meeting, released overnight, reaffirmed the central bank's commitment to maintaining a healthy labor market.

"The argument for a more gradual approach is now firmly established as the prevailing view," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. "The market's momentum is shifting towards reassessing the extent of potential Fed rate cuts in the coming months, particularly given the relatively positive U.S. economic data recently."

San Francisco Fed President Mary Daly stated late Wednesday that she is currently more concerned about the impact on the labor market than about rising inflation.

Traders are placing 85% odds on a 25 basis point rate cut by the Fed at its next policy meeting on November 7, with a 15% probability of no change, according to the CME Group's FedWatch Tool. Just a week earlier, markets viewed a cut as nearly certain, with 35% odds for an additional half-point reduction.

By 0830 GMT, the dollar index was relatively unchanged at 102.93, remaining near its highest level since mid-August.

"There’s a limit to how much further the pricing for interest rate cuts can be adjusted without strong guidance from senior Federal Open Market Committee (FOMC) officials," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia. He predicts 50 basis points of cuts across the remaining Fed meetings this year.

The risk-sensitive Australian dollar rose 0.11% to $0.6726, having earlier gained more than 0.3% following a rally in equities in its largest trading partner, China. This increase was spurred by China's central bank launching a swap program aimed at stabilizing the stock market.

China's finance ministry is expected to hold a highly anticipated press conference on fiscal policy this Saturday.

Tan from RBC anticipates that China will announce fiscal stimulus during the conference, which he believes will provide "a solid foundation for China’s economy." He expects this stimulus to support the yuan, which has recently weakened, and bolster other Asian currencies, including the Singapore dollar and the Indonesian rupiah.

Paraphrasing text from "Reuters" all rights reserved by the original author.