Investing.com – The U.S. dollar climbed to modern highs on Wednesday as uncertainty over U.S. interest rates and the upcoming presidential election kept safe-haven demand.

At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the dollar against a basket of six other currencies, was trading 0.3% higher at 104.175, near its highest level in almost three months.

The risk points to an escalate in the dollar

The dollar climbed to its highest level since early August as reasonably good economic data dampened expectations for aggressive interest rate cuts from the Federal Reserve.

Traders priced in an 85.9% chance of a 25 basis point cut in November and a 14.1% chance that rates would remain unchanged, CME Fedwatch showed.

This change in attitude has sent U.S. Treasury yields soaring in response to expectations for relatively higher rates, with the 10-year yield hitting a three-month high this week.

The dollar is also supported by rising expectations that Republican candidate Donald Trump will win the US presidential election early next month, given that his protectionist policies are strengthening the US currency.

“Key market factors continue to support the dollar. Today we could observe some weakening of economic growth dynamics, but in the face of the US elections, the balance of risks remains tilted to the advantage,” ING analysts said in a note.

More ECB interest rate cuts are on the way

In Europe, it fell 0.1% to 1.0785, with the euro weakening amid rising expectations that the European Central Bank may cut interest rates more aggressively in the future given uncertain growth prospects.

The Council has already cut interest rates three times this year from record levels, and markets expect policy easing at each of its upcoming meetings until the end of the modern year.

The International Monetary Fund said on Tuesday that the German economy, Europe’s largest, will stagnate this year, lowering its growth forecast from a previous growth of 0.2%.

Additionally, inflation in the euro zone is falling and may fall to 2% faster than previously thought, ECB President Christine Lagarde said on Tuesday, supporting further interest rate cuts.

fell 0.1% to 1.2969 ahead of the Bank of England governor’s speech later in the day, which could provide more clues about further monetary policy.

Bailey said in an interview earlier this month that the central bank could take more aggressive action to cut interest rates if inflation pressures continue to ease.

The UK interest rate has since fallen to 1.7% on an annualized basis – the first time since April 2021 that it has fallen below the Bank of England’s target of 2%.

“The cable may further increase to 1.28 by the end of the month,” ING added.

Yen loses ahead of general election

rose 0.9% to 152.38, above the 152 level for the first time since July 31, and the latest polls indicate that the ruling Liberal Democratic Party may lose its majority to coalition partner Komeito in this weekend’s general elections.

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.

The BOJ is also scheduled to meet next week, but is unlikely to raise interest rates. Earlier on Friday, we will know consumer inflation from Tokyo.

rose 0.1% to 7.1265, with attention turning to the upcoming meeting of China’s National People’s Congress for more guidance on fiscal spending.

rose 0.1% to 1.3824 ahead of the final policymaking meeting later this session.

“Markets are pricing in a 45 basis point easing of monetary policy by the Bank of Canada today. The reason is that inflation is now below target and the mild growth picture justifies a 50 basis point faster move to neutral rates,” ING said. “It’s a very close call, but we think 25bps remains a bit more likely.”