Market Analysis

Dollar Rises on Optimism for Gradual Fed Rate Cuts and Trump’s Possible Return

Amos Simanungkalit · 24 Oct 202461.2K Views

The U.S. dollar is nearing a three-month high against major currencies, supported by expectations of a slower pace of interest rate cuts by the Federal Reserve and increasing speculation about a potential second term for Donald Trump. As of 0115 GMT, the dollar index, which gauges the currency against six others including the euro and yen, was at 104.38, close to the recent peak of 104.57, the highest since July 30.

Robust economic data and hawkish remarks from Fed officials have reduced expectations for monetary easing this year, as indicated by the CME Group's FedWatch Tool. Predictions for a 50-basis-point rate cut in the last two meetings of 2024 have decreased to about 65% from 70% the previous day, and down from 85% a week earlier. Kansas City Fed President Jeffrey Schmid has expressed a desire to "avoid outsized moves," while Philadelphia Fed President Patrick Harker advocated for a "slow, methodical approach" to easing.

In response, U.S. 10-year Treasury yields rose to a three-month high of 4.26% overnight. As U.S. bond yields increase, the Japanese yen typically weakens, with the dollar reaching as high as 153.19 yen on Wednesday, the highest since July 31. Currently, the dollar is trading at 152.62 yen. According to Rodrigo Catril, a senior FX strategist at National Australia Bank, the combination of strong economic momentum and Fed messaging about gradual easing is causing market unease, favoring the dollar, particularly against the yen.

The dollar has breached important technical resistance levels against the yen, potentially allowing for further gains. Additionally, rising market expectations of a Trump victory in the upcoming election have bolstered the dollar, as such a win could lead to inflationary policies like tariffs.

In Japan, recent polls indicate a risk of the ruling coalition losing its parliamentary majority in Sunday’s election, which could introduce political uncertainty that complicates the Bank of Japan's monetary tightening plans. The central bank is expected to maintain its current policy at its meeting on October 31.

The euro fell to a nearly four-month low of $1.07612 overnight and was last seen at $1.07845. Traders have increased their bets on quicker and potentially larger rate cuts from the European Central Bank (ECB), following warnings from several policymakers about the risks of not meeting the 2% inflation target. ECB President Christine Lagarde advised a cautious approach to policy decisions, while fellow policymaker Mario Centeno hinted at the possibility of a 50-basis-point rate cut at the next meeting on December 12.