Dollar stands tall on bets for slower Fed cuts, potential Trump win

By Kevin Buckland

TOKYO (Reuters) - The U.S. dollar traded close to a three-month high against major peers on Thursday, underpinned by expectations for a slower pace interest rate cuts by the Federal Reserve and growing bets of a possible second Donald Trump presidency.

The dollar index, which measures the currency against six rivals including the euro and yen, stood at 104.38 as of 0115 GMT, not far from the overnight high of 104.57, a level last seen on July 30.

A spate of robust macroeconomic indicators and some hawkish comments from Fed officials have tempered bets for monetary easing over the rest of this year, according to CME Group's FedWatch Tool. Expectations for 50-basis-point rate cuts over the remaining two meetings of 2024 as opposed to a smaller reduction dropped to about 65% from about 70% a day earlier, and about 85% a week ago.

This week, Kansas City Fed President Jeffrey Schmid said he would prefer to "avoid outsized moves", and Philadelphia Fed President Patrick Harker backed "a slow, methodical approach" to further easing.

U.S. 10-year Treasury yields have risen in response, reaching a three-month high of 4.26% overnight.

The Japanese yen tends to weaken when U.S. bonds yields climb, and the dollar pushed as high as 153.19 yen on Wednesday for the first time since July 31. The pair last changed hands at 152.62 yen.

"Solid economic momentum as well as Fed messaging emphasising a gradual and deliberate approach to further policy easing is making the market nervous," said Rodrigo Catril, senior FX strategist at National Australia Bank.

"Nervousness in the air alongside higher UST yields has favoured the USD, with JPY leading declines within G10 pairs."

The dollar has now "punched through key technical resistance levels" against the yen, "opening the door for higher levels", Catril said.

The dollar has also benefited from a recent rise in market expectations for a victory next month by Republican candidate and former President Trump, which would likely bring about inflationary policies such as tariffs.

Although opinion polls indicate a neck-and-neck race with Democratic rival, Vice President Kamala Harris, cryptocurrency-prediction exchange Polymarket has seen a sharp rise in bets for a Trump win.

Meanwhile in Japan, recent polls show the possibility of the coalition government losing its majority parliament in Sunday's election, with the potential rise in political risk complicating the Bank of Japan's plans for monetary tightening. The central bank's next policy decision is on Oct. 31, and it is widely expected to stand pat this time.

The euro slumped to a nearly four-month trough of $1.07612 overnight, and last changed hands at $1.07845.

Traders have ramped up bets on faster and potentially bigger rate cuts from the European Central Bank after a host of policymakers warned about the risk of undershooting the central bank's 2% inflation target - a remarkable change in tone after a two-year campaign to rein in prices.

On Wednesday, ECB President Christine Lagarde took a more measured stance, saying policymakers need to be "cautious" in deciding policy, although colleague Mario Centeno suggested rates could be cut by 50 basis points at the monetary authority's next meeting on Dec. 12.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam)