Fed forecast pushes dollar to two-and-a-half month high; yen under pressure

The yen remained under pressure as dollar and U.S. Treasury yields rose, pushing them to a three-month low.

The dollar rose for three weeks as expectations of an aggressive rate hike from the Federal Reserve faded following a slew of upbeat economic data.

Markets now have a 91% chance of pricing in a modest quarter-basis point decline in November, the CME FedWatch tool showed. A month earlier, investors split rates by 50 basis points.

The Fed’s less dovish outlook helped support Treasury yields. The yield on the benchmark 10-year note on Tuesday hit its highest level since July 26 at 4.222%.

In a light calendar of economic data on Wednesday, the standout event was the release of the Fed’s Beige Book review of economic conditions. The latest Beige Book pointed to slower economic growth with isolated strengths, a pattern likely to be repeated in the October report, said senior market analyst Matt Simpson at City Index. However, an upward surprise seems more likely given that the latest data beat forecasts, he said. “However, the US dollar index and US bond yields showed only modest gains on Tuesday, suggesting bulls should proceed with caution, especially if we see a two-year decline below 4%.”

The dollar index, which measures the U.S. currency against six other currencies, was last up 0.11% at 104.18 after hitting 104.19, its highest level since Aug. 2. The index is up more than 3% this month.

With weeks before the presidential election votes are counted, investors are weighing the risk of a Republican victory, which is widely expected to be the most optimistic election scenario for the US dollar.

Democratic Vice President Kamala Harris leads former Republican President Donald Trump 46% to 43%, according to a new Reuters/Ipsos poll.

Markets nonetheless appear to be pricing in a Trump victory, but there is still “plenty of time” to reassess, City Index’s Simpson said.

“We could even see a slight pullback in the mighty dollar and yields if markets price Harris’ victory given that her policies are seen as less inflationary.”

Rising US Treasury yields kept pressure on the yen, which fell to a three-month low of 151.72 against the US dollar.

Japan is set to hold general elections on October 27. Recent opinion polls have suggested the ruling Liberal Democratic Party could lose its majority to coalition partner Komeito.

The risk of a minority coalition government has raised the prospect of political instability, complicating the Bank of Japan’s efforts to reduce reliance on monetary stimulus.

Elsewhere, the euro last traded at $1.0794 after falling to its lowest level since Aug. 2 at $1.0792. European Central Bank policymakers joined forces on Tuesday to flag the risk of inflation falling below the bank’s 2% target.

Sterling traded at $1.2976 after falling to its lowest level since August 19 at $1.2945 in the previous session.

In cryptocurrencies, Bitcoin lost 0.33% to $67,254.00.