Chuck Mikołajczak
NEW YORK (Reuters) – The dollar rose above 153 against the yen on Wednesday for the first time in nearly three months on the strength of the U.S. economy and an expected divergence in the pace of interest rate cuts by the world’s major central banks.
The dollar is on track for a 16th gain in 18 sessions and a fourth straight week of gains as a spate of positive economic data dampened expectations about the size and pace of Federal Reserve interest rate cuts, pushing up U.S. Treasury yields.
The yield on the benchmark 10-year US bond rose 3.4 basis points (bps) to 4.24%, after hitting a three-month high of 4.26%. After falling for five straight months, the 10-year bond yield rose by about 40 basis points in October.
Investors were also preparing for the US presidential elections scheduled for November 5.
“We have moved from phase one to phase two, if you will, and phase one is that the recovery is all about the U.S. economy, based on the strong data that we have received over the last month or so… and that second phase may be all about politics.” – said George Vessey, chief currency strategist at Convera in London.
“However, the focus on a stronger dollar in the short term will likely from here on be more focused on Trump’s potential hedges rather than the interest rate story, which is likely overblown but still sees yields rising.”
The dollar rate, which measures the greenback against a basket of currencies, rose 0.32% to 104.43, after rising to 104.57, the highest level since July 30. The euro fell 0.18% to $1.0778 after falling to $1.076, the lowest level since July 3. The pound sterling weakened 0.49% to $1.2919.
Recent comments from Fed officials indicate that the central bank will gradually move to lower interest rates.
The central bank’s “Beige Book” released Wednesday showed that economic activity was little changed from September to early October, while companies saw employment growth, continuing recent trends that have reinforced expectations that the Fed will opt for a smaller rate cut. percentage points by 25 basis points. its November meeting.
According to CME’s FedWatch Tool, markets are pricing in an 88.9% chance of a 25 basis point cut at the Fed’s November meeting, with an 11.1% chance that the central bank will keep rates steady. The market was fully pricing in a cut of at least 25 bp a month ago, with a 53% chance of a 50 bp cut.
The upcoming U.S. presidential election also continues to fuel currency movements as market expectations have risen in recent days for Republican presidential candidate and former President Donald Trump to win, which would likely lead to inflationary policies such as tariffs.
The Bank of Canada cut its key benchmark rate by 50 basis points to 3.75% on Wednesday, in line with broad market expectations, the first larger-than-usual move in more than four years, and welcomed signs that the country is returning to an era of low inflation. The Canadian dollar was 0.14% weaker against the dollar at 1.38 per dollar.
The President of the European Central Bank (ECB), Christine Lagarde, said on Wednesday that the central bank will have to be careful when deciding on further interest rate cuts and be guided by incoming data.
Additionally, ECB chief economist Philip Lane said the recent flow of relatively delicate data on the euro zone economy had raised questions about the bloc’s prospects, but the European Central Bank still expected the economic recovery to continue.
Against the Japanese yen, the dollar strengthened 0.99% to 152.56, the biggest daily percentage gain since October 4, after rising to 153.18, the highest level since July 31, when the Bank of Japan raised interest rates to the highest level since 2007.
Japan’s general election will be held on October 27. Recent polls indicate that the ruling Liberal Democratic Party may lose its majority to coalition partner Komeito.
The risk of a minority coalition government has raised the prospect of political instability, which is complicating the Bank of Japan’s efforts to reduce reliance on monetary stimulus.
