Dollar Eases from Seven-Week Highs as Rate Cut Outlook Shifts

The U.S. dollar eased slightly on Tuesday from near seven-week highs against major currencies, as investors reassessed the outlook for U.S. interest rate cuts. Geopolitical tensions in the Middle East, however, continued to support the dollar’s appeal as a safe-haven asset.

The euro gained 0.2%, trading at $1.0992, after reaching a seven-week low of $1.0952 last week. Similarly, the pound rose to $1.31, recovering from a three-week low of $1.3059 hit on Monday.

Shifting Expectations on U.S. Rate Cuts
Investors have drastically reduced expectations for aggressive monetary easing by the Federal Reserve this year. Last week’s strong U.S. jobs report reinforced Fed Chair Jerome Powell’s stance that the central bank would likely stick to smaller quarter-percentage-point rate reductions, despite the larger-than-usual rate cut in September.

John Williams, President of the Federal Reserve Bank of New York and a permanent voting member of the rate-setting committee, echoed Powell’s remarks. He told the Financial Times that the September rate cut should not be seen as setting a precedent for future moves.

As a result, markets are no longer fully pricing in a rate cut for November, with the CME FedWatch tool now showing a 90% chance of a 25-basis-point cut. Expectations for easing in December have also been revised down to 50 basis points, from over 70 bps a week earlier.

Yen Recovers Amid Geopolitical Tensions
While the dollar remained strong against most major currencies, safe-haven demand allowed the yen to recover some losses on Tuesday, as rising geopolitical concerns in the Middle East pushed investors toward safer assets.

The dollar index, which measures the U.S. currency against a basket of six major rivals, slipped 0.2% to 102.31.

Market Focus: U.S. Inflation Data and Fed Minutes
Investors are closely watching for key U.S. inflation data, due on Thursday, as well as minutes from the Federal Reserve’s September meeting, set for release on Wednesday. These could offer more insight into the Fed’s rate outlook.

Meanwhile, the benchmark 10-year U.S. Treasury yield remained above 4%, having hit this level on Monday for the first time in two months. Traders have scaled back expectations of larger rate cuts in light of stronger economic data.

Chinese Markets Rebound, But Optimism Fades
Chinese equity markets reopened strongly after a week-long holiday, buoyed by optimism around stimulus measures. However, some gains were capped as investors grew cautious due to the lack of specific details on Beijing’s economic support plans.