Dollar Near Three-Month High as Traders Scale Back Rate Cut Bets; Yen Recovers Slightly
The U.S. dollar hovered near a three-month high on Tuesday as Federal Reserve divisions prompted traders to trim their rate cut expectations. Meanwhile, the Japanese yen rebounded slightly from an eight-month low following verbal intervention warnings from Tokyo officials.
The Australian dollar (AUD) weakened 0.44% after the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 3.60%, as expected. The central bank warned against further easing, citing stubborn core inflation, resilient consumer demand, and a recovery in the housing market.
Market sentiment remained risk-averse, as uncertainty over U.S. interest rate policy and the ongoing federal government shutdown weighed on investor confidence. Traders are now focusing on non-government data releases this week to gauge economic conditions.
Data Gap Clouds Fed Outlook
With official U.S. economic data delayed due to the shutdown, Federal Reserve officials offered conflicting views about the economy’s direction.
The Fed cut rates last week, but Chair Jerome Powell hinted that this could be the final reduction of the year. According to CME FedWatch, traders now see a 65% chance of a December rate cut, down from 94% a week earlier.
This shift in expectations has strengthened the dollar. The euro touched a three-month low of $1.1498 before stabilizing at $1.1525, while sterling traded at $1.3125.
The U.S. Dollar Index (DXY) briefly breached 100 for the first time since early August, last standing at 99.822.
Carol Kong, currency strategist at the Commonwealth Bank of Australia, noted that diverging Fed opinions signal uncertainty:
“Without official U.S. data, it’s hard to see a sharp pullback in rate cut pricing or strong gains in the dollar,” she said.
Aussie Pressured as RBA Raises Inflation Forecasts
The Australian dollar last traded at $0.6511, reacting to the RBA’s updated policy statement, which revised inflation expectations higher.
The RBA now projects underlying inflation (trimmed mean) to rise to 3.2% by year-end, compared with 3% currently and a previous forecast of 2.6% in the coming years.
Kong added that the RBA’s cautious tone aligns with expectations that the bank will keep rates on hold for the foreseeable future:
“The statement wasn’t as hawkish as it could have been, which added mild downward pressure on AUD/USD,” she explained.
Yen Strengthens After Tokyo’s Verbal Intervention
The Japanese yen firmed 0.3% to 153.65 per dollar, recovering after sliding to an eight-and-a-half-month low earlier in the session.
The move followed comments from Japan’s Finance Minister Satsuki Katayama, who said the government is closely monitoring currency movements with “a high sense of urgency.”
Last week, Bank of Japan (BOJ) Governor Kazuo Ueda hinted that a rate hike could come as early as December, though markets remain skeptical about the BOJ’s cautious pace.
Analysts note the yen is nearing levels that triggered official intervention in 2022 and 2024.
Thomas Mathews, head of markets for Asia-Pacific at Capital Economics, said:
“The yen remains very weak across most metrics. Unless the BOJ tightens policy soon—which seems unlikely—the currency could weaken further in the near term.”
Investors Seek Data Amid Ongoing U.S. Shutdown
With official reports suspended, investors are relying on private-sector data, including ADP employment figures, to assess the U.S. economy’s health.
Recent ISM manufacturing data showed U.S. factory activity contracted for the eighth consecutive month in October, signaling persistent weakness in the industrial sector.
Overall, monetary policy divergence between major central banks and delayed U.S. economic data continue to support the dollar and weigh on Asian currencies, leaving markets in a cautious holding pattern.
