The U.S. dollar maintained its bullish momentum, reaching a 10-week high against major currencies, driven by solid U.S. economic data and tempered expectations for aggressive Federal Reserve rate cuts. The dollar index rose to 104.38, not far from its overnight high of 104.57, marking its highest level since late July. Meanwhile, the Japanese yen struggled as traders brace for potential intervention by Japan’s Ministry of Finance to curb the yen’s weakness.
Yen Consolidates Amid Intervention Warnings
The yen remained steady against major currencies but weakened against the U.S. dollar, trading at 152.67 after touching 153.19, its highest level since the end of July. Japanese authorities are expected to ramp up warnings against yen weakness as the USD/JPY pair punches through key technical resistance levels, potentially opening the door to further gains for the dollar.
The yen’s decline has reignited concerns about another round of FX intervention by Japan’s Ministry of Finance, a strategy that has been used in the past to defend the currency.
Dollar’s Strength Tied to Slower Fed Cuts and Election Bets
The greenback has been supported by rising U.S. Treasury yields, with the 10-year yield hitting 4.26%, a three-month high. Market participants are increasingly pricing in a slower pace of Fed rate cuts, with Kansas City Fed President Jeffrey Schmid and Philadelphia Fed President Patrick Harker advocating for a gradual approach to easing.
Adding to the dollar’s strength is the growing market expectation of a potential Donald Trump win in the upcoming U.S. presidential election. Traders anticipate that a Trump victory could lead to inflationary policies, such as tariffs, boosting demand for the dollar as a safe haven.
Euro and Sterling Weaken
The euro fell to a nearly four-month low at $1.07612, as traders increased bets on faster and larger rate cuts from the European Central Bank. ECB President Christine Lagarde has taken a cautious stance, while some policymakers, like Mario Centeno, have suggested that a 50-basis-point rate cut may be on the table for the ECB’s next meeting.
Sterling also weakened, dropping 0.49% to $1.2919, as concerns grow over the BoE’s approach to inflation. BoE Governor Andrew Bailey emphasized that service price inflation remains high, indicating that further action may be required to bring inflation under control.
Commodities and Global Markets
- Oil: Fell 1.39% as U.S. crude inventories rose more than expected.
- Gold: Declined 1.24% due to the stronger dollar and higher U.S. Treasury yields.
- Copper: Slipped 1.03% amid concerns over global growth and lackluster demand from China. Looking Ahead: Key Events
- Japan’s General Election on Oct. 27: With polls indicating that the ruling coalition could lose its majority, political uncertainty in Japan may further complicate the Bank of Japan’s plans for monetary tightening.
- U.S. Presidential Election: The market’s focus remains on the U.S. election, where growing bets for a Trump victory are impacting market sentiment and positioning, especially in the dollar and yen. Conclusion: Dollar Rally Looks Set to Continue
With U.S. Treasury yields climbing and Fed officials emphasizing a deliberate and gradual approach to rate cuts, the dollar’s strength appears to be intact for the near term. The yen, however, remains vulnerable to intervention, while the euro and sterling face continued downside risks amid central bank uncertainties.
Traders should keep a close eye on upcoming central bank decisions, political developments, and economic data to navigate the volatility in the currency markets.
