It was generally a favorable day for the dollar, as expectations for a surprise Federal Reserve interest rate hold next month increased.
Dollar rises as hawkish Fed repricing keeps on
On Tuesday afternoon UK time, the euro declined to USD 1.0806, down from USD 1.0847 the previous day. The pound also fell, dropping to USD 1.2952 from USD 1.3029.
U.S. Treasury yields surged to their highest level in about three months, reflecting a growing belief that the Federal Reserve may choose to keep rates steady next month. Although still considered unlikely, the chances of such a move have risen.
The yield on the 10-year U.S. government bond exceeded 4.22% on Tuesday for the first time since late July. It later eased to around 4.18%, yet the dollar remained strong.
According to the CME FedWatch Tool, there is now a 9.0% probability that the U.S. central bank will hold rates steady next month, a significant increase from a 3.0% likelihood just a week ago. A month prior, the tool indicated no chance of a Fed hold in November.
"We believe that recent U.S. data and Fed comments continue to support a very gradual easing cycle. Market expectations for Fed easing have adjusted following a series of strong U.S. data but remain too dovish. As the Fed's positioning evolves, the dollar should see another upward movement. Meanwhile, soft data and dovish central banks elsewhere highlight ongoing divergences that favor the greenback," noted analysts at Brown Brothers Harriman.
Against the Swiss franc, the dollar rose to CHF 0.8658 on Tuesday, up from CHF 0.8643 on Monday. It also increased against the yen, climbing to JPY 150.95 from JPY 149.93.
Traders are also keeping an eye on the upcoming U.S. election, which is just two weeks away.
ING analysts remarked: "With two weeks until November 5, we are seeing a growing shift in sentiment across financial and betting markets in favor of Donald Trump. Polls still indicate a close race, but risks appear tilted towards a stronger dollar and weaker risk-sensitive currencies as Trump’s chances increase leading up to the vote."
They added, "In the absence of any response from Japanese authorities, the combination of a stronger dollar and Japan's political risk premium could push USD/JPY back to the 153-155 range before the U.S. election."
Approval ratings for Japan’s new Prime Minister, Shigeru Ishiba, have declined ahead of the general election on October 27, with one poll indicating that the ruling coalition may struggle to maintain a majority.
Against the Canadian dollar, the U.S. currency increased to CAD 1.3829 on Tuesday, up from CAD 1.3822 on Monday. However, it slipped slightly against the Australian dollar, falling to AUD 1.4953 from AUD 1.4962.
In terms of the euro, the pound dropped to EUR 1.1984 on Tuesday, down from EUR 1.2006 the previous day.
