Dollar continues rally, hits 3-month high vs yen

By Chuck Mikolajczak
NEW YORK (Reuters) -The dollar climbed above 153 against the yen for the first time in nearly three months on Wednesday on U.S. economic strength and an expected divergence among major global central banks’ pace of interest rate cuts.
The greenback is on track for its 16th gain in 18 sessions and fourth straight week of gains as a run of positive economic data has dampened expectations about the size and speed of rate cuts from the Federal Reserve, which has pushed U.S. Treasury yields higher.
The yield on benchmark U.S. 10-year notes rose 3.4 basis points (bps) to 4.24%, after hitting a 3-month high of 4.26%. After declining for five straight months, the yield on the 10-year is up about 40 basis points for October.
Investors were also positioning ahead of the U.S. presidential election on Nov. 5.
“We’ve gone from phase one to phase two, if you like, the phase one being that the recovery being all about the U.S. economy, the strong data that we’ve had coming out over the past month or so… and this second phase could be all about politics,” said George Vessey, lead FX strategist at Convera in London.
“But the bias for a stronger dollar in the short term probably from here is going to be more of potential Trump hedges rather than the rate story which arguably is overblown, but having said that you continue to see yields surging higher.”
The dollar index, which measures the greenback against a basket of currencies, rose 0.32% to 104.43, after climbing to 104.57, its highest since July 30. The euro was down 0.18% at $1.0778 after dropping to $1.076, its lowest since July 3. Sterling weakened 0.49% to $1.2919.
Recent comments from Fed officials have indicated the central bank will take a gradual approach to cutting rates.
The central bank’s “Beige Book” released on Wednesday showed economic activity was little changed from September through early October while firms saw an uptick in hiring, continuing recent trends that have reinforced expectations the Fed will settle on a smaller 25-basis-point cut at its November meeting.
Markets are pricing in an 88.9% chance for a cut of 25 basis points at the Fed’s November meeting, with an 11.1% chance of the central bank holding rates steady, according to CME’s FedWatch Tool. The market was completely pricing in a cut of at least 25 bps a month ago, with a 53% chance of a 50 bps cut.
The upcoming U.S. presidential election also continues to drive currency moves, as market expectations have grown in recent days for a victory by Republican presidential candidate and former President Donald Trump, which would likely bring about inflationary policies such as tariffs.
The Bank of Canada on Wednesday cut its key benchmark rate by 50 basis points to 3.75%, as was widely expected by the market, its first bigger-than-usual move in more than four years, and hailed signs the country has returned to an era of low inflation. The Canadian dollar was 0.14% weaker versus the greenback to 1.38 per dollar.
European Central Bank (ECB) President Christine Lagarde said on Wednesday the central bank will need to be cautious when deciding on further interest rate reductions and take its cue from incoming data.
In addition, ECB chief economist Philip Lane said the recent flow of relatively weak data on the euro zone economy has raised questions about the bloc’s prospects but the European Central Bank still expects the recovery to take hold.
Against the Japanese yen, the dollar strengthened 0.99% to 152.56, on track for its biggest daily percentage gain since Oct. 4, after climbing to 153.18, its highest since July 31, when the Bank of Japan raised interest rates to their highest since 2007.
Japan is set to hold a general election on Oct. 27. Recent opinion polls indicated that the ruling Liberal Democratic Party could lose its majority with coalition partner Komeito.
The risk of a minority coalition government has raised the prospect of political instability complicating the Bank of Japan’s effort to reduce dependence on monetary stimulus.
(Reporting by Chuck Mikolajczak; Editing by Emelia Sithole-Matarise and Marguerita Choy)