“Largely I think we’re still basing currency movements on interest rates,” and the Fed’s “very determined attempt to keep interest rates high to fight inflation,” said Joseph Trevisani, senior analyst at FXStreet.com in New York.
Since mid-July, the benchmark 10-year Treasury yield has climbed about 120 basis points and the dollar index has risen around 7%.
Fed funds futures traders are pricing in a 39% chance that the Fed could hike rates again by year-end, but only 6% odds of an increase next month, according to the CME Group’s FedWatch Tool.
In a strong signal that the Fed will not raise interest rates at its next meeting but could easily do so later, Fed Governor Christopher Waller said he wants to “wait, watch and see” if the U.S. economy continues its run of strength or weakens in the face of the Fed’s rate hikes to date.
Fed Bank of New York President John Williams also said interest rates will need to stay high for a while to get inflation back to the central bank’s 2% target.
Fed Chaiman Jerome Powell and several regional Fed presidents are due to give comments on Thursday before Fed officials enter into a blackout period on Oct. 21 before the central bank’s Oct. 31–Nov. 1 meeting.
The U.S. central bank’s “Beige Book” indicated that U.S. economic activity was little changed over the last month and a half, as labor market tightness continued to ease and prices continued to increase at a modest pace.
The dollar index was last up 0.32% on the day at 106.55. It is holding below the 107.34 level reached on Oct. 3, the highest since November 2022.
The euro dipped 0.38% to $1.0536. It is up from $1.0448 on Oct. 3, the lowest since December 2022.
The dollar is also benefiting from safe haven demand on concerns over the conflict in the Middle East.
U.S. President Joe Biden pledged solidarity with Israel on Wednesday and said a deadly blast at a Gaza hospital seemed to have been caused by a rocket misfired by militants.
Sterling fell after a brief pop as British consumer price inflation (CPI) unexpectedly held at 6.7% in September, remaining the highest of any major advanced economy and keeping alive the possibility of another rise in interest rates.
The pound was last down 0.32% at $1.2144.
The yen weakened against the greenback to a two-week low of 149.89. The Bank of Japan unexpectedly announced $2 billion in bond-buying to keep downward pressure on yields.
The 150 yen mark has become a psychological level after past government interventions to prop up the currency occurred around that point. Earlier in October, the yen rallied sharply after falling past 150, although it later fell back and early indications suggest Japan did not intervene.
