Authors: Amanda Cooper and Brigid Riley

LONDON/TOKYO (Reuters) – The U.S. dollar strengthened significantly on Tuesday after Federal Reserve Chairman Jerome Powell rejected bets on larger interest rate cuts.

The yen has remained near the midpoint of its range against the dollar over the past month after two days of volatility as investors assessed Japan’s next prime minister and his cabinet.

The Australian dollar edged closer to Monday’s high after upbeat domestic retail sales data, while the euro posted a third daily loss as inflation data raised the likelihood of a rate cut this month.

In the United States, Powell took a more hawkish tone during a speech at a conference in Tennessee, saying the world’s largest central bank would likely continue to cut interest rates by a quarter of a percentage point.

“This is not a committee that feels like it is in a hurry to reduce interest rates quickly,” he said.

Traders remain confident the Fed will cut again at its next policy meeting in November, but they lowered expectations for a 50 basis point (bps) cut to 35.4% from 53.3% a day earlier, according to CME Group (NASDAQ:) FedWatch Tool.

“The door has not been closed on a 50 basis point cut because if the economic data is sufficient then such a cut will be justified. However, Powell clearly believes that markets are “overexcited” about upcoming cuts, said Matt Simpson, senior market analyst at City Index.

The Fed began its easing cycle last month with a larger-than-expected half-point cut.

Powell’s speech came ahead of a week heavy with U.S. data, including Tuesday’s Institute for Supply Management manufacturing index and Thursday’s non-manufacturing sector report, followed by Friday’s potentially key monthly employment data.

If ISM non-manufacturing data and the jobs report are above expectations again this month, the dollar could see a “decent bounce” up before eventually returning to the downward path, Simpson said.

The stock was up 0.1% at 100.87 at 0403 GMT, after rising 0.3% on Monday, when it posted its third straight monthly decline, following a decline of almost 1% in September.

The dollar rose 0.3% to 144.01 yen, after falling sharply from 146.495 yen on Friday to as low as 141.65 yen on Monday.

Shigeru Ishiba, who is expected to be confirmed as Japan’s new prime minister on Tuesday, is seen by markets as a monetary policy hawk despite a recent softening of rhetoric on the need to normalize policy.

He won votes for his party’s leader on Friday in one of the tightest races in history, and is now trying to unite the party after calling an early general election for October 27.

Minutes of the Bank of Japan’s (BOJ) September meeting showed on Tuesday that policymakers discussed the need to exercise caution on short-term interest rate increases that have little impact on the market.

“Ultimately, our stance on the BOJ remains more hawkish than the market’s pricing in tightening monetary policy by 13 basis points over the next three meetings, so even if the tactical picture is more skewed towards the dollar/yen – not least due to the risk of a higher dollar correction – we are not ready to call for continued worse performance of the yen for many months,” said Francesco Pesole, strategist at ING.

The euro was trading near Monday’s week-long low after inflation in Germany fell to its lowest level since early 2021, fueling speculation of another interest rate cut this month.

The euro fell slightly to $1.1124 after falling to $1.1113 in the previous session.

European Central Bank President Christine Lagarde told parliament that “recent events strengthen our confidence that inflation will return to the target in due course”, which should be reflected in the policy decision on October 17.

Deutsche Bank changed its ECB call on Tuesday, saying there would be another interest rate cut in October, compared to its earlier forecast of another cut in December.

It was flat at $0.6914, holding near a year-and-a-half high of $0.6943 reached on Monday after Australian retail sales rebounded more than expected in August.

The quote amounted to USD 0.6321, which means a decline of 0.5%.