U.S. Dollar Rises to Two-Month High as Fed Eyes Modest Rate Cuts

The U.S. dollar reached its highest level in over two months on Tuesday, buoyed by expectations that the Federal Reserve will proceed with modest interest rate cuts in the near future. Traders are anticipating smaller cuts from the central bank, shifting the currency landscape and pushing the dollar to new heights against its major rivals. Meanwhile, the yen inched closer to a key psychological threshold, reflecting the diverging monetary policies in Japan and the U.S.

Dollar Strength Driven by Fed Rate Cut Expectations
The U.S. dollar index, which measures the greenback’s performance against six major currencies, climbed to 103.18, just shy of its two-month high of 103.36 touched on Monday. The index has surged 2.5% in recent weeks, putting it on track to snap a three-month losing streak. This rebound is being driven by market sentiment that the Federal Reserve is adopting a more cautious approach to its rate-cutting cycle, following stronger-than-expected economic data.
U.S. inflation data from September showed prices rising slightly more than anticipated, leading traders to scale back their expectations for aggressive rate cuts. The U.S. economy, while showing signs of slowing, has remained resilient in recent months, with modest economic cooling failing to bring inflation fully in check. This backdrop has made it less likely that the Fed will implement large rate cuts in the immediate future.
Although the Fed initiated its easing cycle with a sharp 50-basis-point cut at its September meeting, traders now assign an 89% chance of a smaller, 25-basis-point cut in November, with a total of 45 basis points of cuts priced in for the remainder of the year. However, remarks from Federal Reserve Governor Christopher Waller have added to the market’s uncertainty. Waller emphasized the need for "more caution" regarding additional cuts, suggesting that the Fed may adopt a gradual approach to easing over the next year.
"Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year," Waller said. He also noted that disruptions from recent hurricanes and a strike at Boeing could skew upcoming labor market data, including the highly anticipated non-farm payrolls (NFP) report due in November. With potential distortions looming, traders may find it more difficult to gauge the market ahead of the Federal Open Market Committee (FOMC) meeting next month.

Euro and Yen Struggle as Dollar Soars
As the U.S. dollar gains momentum, other major currencies have felt the pressure. The euro has hovered near its lowest point since early August, as traders brace for the European Central Bank’s (ECB) upcoming policy meeting on Thursday. The ECB is expected to deliver another interest rate cut, which would further weigh on the euro’s value against the dollar. On Tuesday, the euro traded at $1.0908, close to Monday’s lows.
In Japan, the yen has continued its downward slide, nearing the critical 150 per dollar mark. The yen last fetched 149.55 per dollar, having briefly touched a two-and-a-half-month low of 149.98 during Monday’s trading. A dovish shift in tone from Bank of Japan Governor Kazuo Ueda, coupled with new Prime Minister Shigeru Ishiba’s surprising opposition to rate hikes, has cast doubt on when Japan’s central bank will tighten its monetary policy. As a result, the yen remains vulnerable, particularly as the dollar strengthens.

Chinese Yuan Steady Amid Stimulus Expectations
The Chinese yuan held steady in offshore markets at 7.0935 per dollar, following reports that Beijing may raise 6 trillion yuan ($850 billion) from Treasury bonds over the next three years to provide additional fiscal stimulus. The news comes as China’s economy continues to struggle with sluggish growth and concerns over deflation. According to Caixin Global, this fresh round of stimulus could be announced at the China National People’s Congress standing committee meeting later this month.
Analysts see these developments as part of a broader push by the Chinese government to stabilize its economy through targeted fiscal policies. "The market now appears to be taking the view that fresh stimulus measures are on the horizon," said Tony Sycamore, market analyst at IG. This expectation of further stimulus could help shore up confidence in China’s financial markets, potentially offering some relief for the yuan.

Outlook For The USD
With the U.S. dollar riding high on expectations of modest Fed rate cuts and resilience in the U.S. economy, it remains to be seen how long this upward trend will continue. While other major currencies like the euro and yen face downward pressure due to divergent monetary policies, the coming weeks will be crucial in determining whether this strength can be sustained. As the Fed and other central banks prepare for key policy meetings, global currency markets are bracing for potential volatility, with traders watching closely for signals of what’s next in the unfolding economic narrative.