The dollar is near the highest level in 3 months as interest rate cut bets decline

The dollar stabilized today, hovering near the highest level in three months, as the division of the Federal Reserve (the US central bank) prompted traders to reduce bets on lowering interest rates.

The yen fell to 154.38 against the dollar during early Asian trading, approaching the lowest level in eight and a half months that it touched last week, raising fears of government intervention.

Federal Reserve officials continued to issue conflicting views about the state of the economy and the risks facing it in light of the absence of economic data that was suspended due to the government closure.

The Federal Reserve cut interest rates last week, but Chairman Jerome Powell indicated that this may be the last cut during the year.

CME’s FedWatch tool showed that traders expect 65 percent of interest rates to be cut in December, compared to 94 percent a week ago.

This shift in near-term expectations has strengthened the dollar.

The euro fell to $1.1498, the lowest level since August 1, while the British pound recorded $1.312 in recent transactions, a decrease of 0.13 percent.

The dollar index, which measures the performance of the US currency against six other currencies, rose 0.1 percent to 99.99, the highest level in three months.

With the absence of official economic data due to the second-longest government shutdown in the United States, investors this week are looking to non-governmental economic data sources, such as ADP employment data, to gauge the strength of the economy.

Data released yesterday on manufacturing industries, revealed by a survey by the Institute for Supply Management, showed a bleak picture for the factory sector, as it showed a contraction in manufacturing industries in the United States for the eighth month in a row in October, with new orders continuing to decline.

“There is no end in sight to the lockdown, and the longer it lasts, the greater the economic impact it will have,” MUFG analysts said in a note.

“Powell likely wants to avoid appearing as though markets are forcing the Fed to cut rates. We continue to see the labor market calling for further rate cuts, but the risk is that the Fed will skip the upcoming meetings,” they added.

Powell’s shift toward monetary tightening came at an inappropriate time for the yen, as the Bank of Japan kept interest rates unchanged last week.

The yen is approaching levels at which Japanese authorities intervened in the markets in 2022 and 2024 to support the currency.

“Right now, the yen appears to be very weak on almost any measure,” said Thomas Matthews, head of Asia-Pacific markets at Capital Economics.

He added, “Investors also still expect some chances of a rate hike at the next meeting. Therefore, unless the Bank of Japan tightens its policy before the end of the year, which is unlikely, the most likely path for the yen is to be weaker in the near term.”

The Australian dollar saw little change, recording $0.6535 ahead of the Reserve Bank of Australia’s monetary policy meeting.

The Australian dollar has risen nearly six percent this year.

The central bank is widely expected to keep interest rates steady after a surprise inflation reading in the third quarter of the year showed that construction and services costs did not slow as hoped.