US Dollar Surges to 2.5-Month High as Markets Bet on Slower Fed Rate Cuts

The US dollar is riding a wave of momentum, reaching its highest point in two and a half months. Investors have pushed the dollar upward, driven by expectations that the Federal Reserve will slow down its pace of rate cuts. Markets now foresee a more cautious reduction in interest rates, bolstered by strong US economic data. The greenback’s steady rise signals its dominance in the currency market, fueled by shifting Federal Reserve policies and anticipation of the upcoming US presidential elections.

The Market’s Adjusted Expectations on Rate Cuts

In the past month, the outlook on Federal Reserve rate cuts has dramatically shifted. Initially, markets expected a cut of at least 50 basis points at the Fed’s November meeting, but robust economic indicators have dimmed these hopes. Currently, there’s a 91% chance of a more modest 25 basis points cut, with a 9% chance that rates will remain unchanged. This adjustment has propelled US Treasury yields higher, with the benchmark 10-year note reaching 4.222%, its highest since late July. As a result, the dollar has posted gains for three straight weeks, making it the strongest performer in the currency markets.

The Greenback’s Rise Over the Last Few Months

Over the last few months, the dollar’s rise has been notable. Since August, the US dollar index, which measures the greenback against a basket of six major currencies, has climbed nearly 3.3%. This gain has been the dollar’s best monthly performance since April 2022. Stronger-than-expected US economic data, such as job growth and consumer spending, have played a key role in diminishing expectations for deep rate cuts, further bolstering the dollar’s value. The dollar's upward march has been particularly sharp against currencies like the Japanese yen, which has dropped to 152 yen per dollar, a level not seen since July. Other currencies, such as the euro and the pound, have also weakened, reflecting the dollar’s dominance.

How the Upcoming US Presidential Elections Could Impact the US Dollar

Beyond the Federal Reserve’s rate policy, the upcoming US presidential election is influencing the dollar’s movements. Speculation about a potential Donald Trump victory is growing among market watchers, as polls suggest the race is tightening. A Trump win could bring back inflationary policies such as tariffs and deregulation, both of which could drive up inflation and further complicate the Federal Reserve’s approach to interest rates.

Trump’s core economic agenda, particularly tariffs on imports, is expected to have inflationary effects, and markets are already beginning to price in the possibility of these policies returning. A Trump victory is widely seen as a bullish scenario for the dollar, as inflationary policies tend to drive the value of the greenback higher. On the other hand, a victory for Kamala Harris would likely lead to policies that prioritize stability and lower inflation, which could temper the dollar’s rise.

All Eyes on the Fed’s Next Move in November

As the US dollar reaches new highs, all eyes are on the Federal Reserve’s next move in November. With a moderate rate cut expected, the dollar’s trajectory could shift. However, the added uncertainty of the US presidential election could keep currency markets on edge. Whether it’s a continuation of Trump-era economic policies or a shift to a new administration, the dollar is poised to remain at the center of global financial attention.

Do you believe the US dollar will continue its rise leading into the election? Or is the situation volatile enough that even a small global event can send markets tumbling? Tell us what you think.

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