Dollar Dominance: Fed's Cautious Approach Strengthens Currency

U.S. dollar reaches its highest level in over two months as traders anticipate a slower pace of Federal Reserve rate cuts. With a stronger economy and slight inflation rise, market sentiment shifts towards modest cuts, boosting the dollar against other major currencies.

The U.S. dollar has surged to its highest point in over two months against key global currencies, driven by market speculation of gradual rate cuts by the Federal Reserve. Recent U.S. economic data points to resilience, with inflation metrics slightly above expectations, leading traders to adjust their expectations for aggressive rate cuts.

The Federal Reserve initiated its current rate-cutting cycle with a significant 50 basis point reduction at its September meeting. Market expectations have since adjusted to anticipate a slower pace of cuts, which has further bolstered the dollar's strength. Traders now predict a 90% likelihood of a 25 basis point cut in November, with a total of 45 basis points priced in for 2023.

Currency strategist Francesco Pesole underscores that the Fed's rate cut repricing is the primary catalyst for the dollar's rebound, as other central banks may not follow suit as quickly. This dynamic has pressured the euro and the British pound, amid expectations of rate adjustments from the European Central Bank and the Bank of England.

(With inputs from agencies.)