Dollar Struggles as Fed Caution Tempers Rate-Cut Bets

The U.S. dollar faced renewed pressure in Asian trading on Tuesday as investors digested a mix of hawkish and dovish signals from Federal Reserve officials ahead of key inflation data later this week. The dollar index steadied at 97.326, after snapping a three-day winning streak on Monday.

Fed Caution Keeps Traders on Edge

Treasury yields edged higher as policymakers urged caution in loosening monetary policy. St. Louis Fed President Alberto Musalem said the central bank “should tread cautiously,” warning that rates may already be close to neutral when adjusted for inflation. Atlanta Fed’s Raphael Bostic and Cleveland Fed’s Beth Hammack also stressed the importance of keeping policy restrictive until inflation convincingly returns to the Fed’s 2% target. Both, however, are not voting members this year.

By contrast, new Governor Stephen Miran took a more aggressive stance, warning that the Fed was underestimating policy tightness and risked damaging the labor market without sharper cuts. This divergence highlighted ongoing debate within the Fed over how quickly to ease conditions after last week’s rate reduction.

Markets Trim October Cut Expectations

According to CME’s FedWatch tool, futures markets now price in just a 10.2% chance of a hold in October, compared with 8.1% on Friday, showing reduced conviction for another immediate cut. Yields responded with the benchmark 10-year Treasury climbing to 4.1467%, its highest in three weeks, while the two-year yield ticked up to 3.6051%.

Currency Moves

• The dollar was flat at ¥147.775, consolidating in its recent range as Japanese markets were closed for a holiday.
• The New Zealand dollar slipped 0.3% to $0.5848 after Wellington flagged a major central bank-related announcement on Wednesday, stirring speculation over leadership changes.
• Gold briefly hit a fresh record high of $3,759.02/oz before paring gains, underscoring ongoing safe-haven demand.

Broader Context

Market sentiment remains shaped not only by Fed policy but also by President Donald Trump’s trade and economic agenda, with tariffs and fiscal policies keeping inflation risks in play. Political uncertainty in Washington also weighs, with Congress facing funding deadlines to avoid a government shutdown by September 30.