Dollar Rallies as Powell Pushes Back on Interest Rate Cut Bets

The U.S. dollar surged after Federal Reserve Chair Jerome Powell dismissed expectations for significant interest rate cuts. The yen remained steady amid political changes in Japan, while the euro and Australian dollar had varied reactions to inflation and retail sales data. Traders adjusted their rate cut predictions for the Fed.

The U.S. dollar surged broadly on Tuesday as Federal Reserve Chair Jerome Powell countered expectations of sharp interest rate cuts. The yen held near the midpoint of its range against the dollar, following volatility sparked by Japan's incoming prime minister and his cabinet.

The Australian dollar inched toward Monday's high after positive domestic retail sales figures, while the euro was set for a third consecutive daily decline due to inflation data suggesting a potential rate cut this month. Powell, in a speech at a Tennessee conference, indicated the central bank would likely continue with quarter-point rate cuts.

'This is not a committee in a rush to cut rates significantly,' Powell stated. Despite firm predictions of another Fed rate cut in November, traders reduced their expectations for a 50 bps cut to 35.4% from 53.3%, as per CME Group's FedWatch Tool.

Matt Simpson, senior market analyst at City Index, noted, 'The door still remains open for a 50 bps cut if economic data worsens, but Powell believes markets are overly optimistic about more substantial cuts.' Powell's comments came ahead of a critical week of U.S. data, including the ISM manufacturing index and jobs report, which could influence the dollar's trajectory.

The dollar index nudged up 0.1% to 100.87 after rising 0.3% on Monday. The dollar appreciated 0.3% against the yen, following substantial fluctuations in recent days. Shigeru Ishiba, set to be Japan's new premier, is viewed as a monetary policy hawk, softening his stance recently to unify his party post-leadership election victory.

Minutes from the Bank of Japan's September meeting showed cautious interest rate discussions had minimal market impact. 'Our hawkish view on the BOJ remains,' said ING strategist Francesco Pesole, suggesting limited yen underperformance despite potential dollar rate corrections.

The euro inched down near a weekly low after German inflation data hinted at another rate cut. ECB President Christine Lagarde expressed confidence in timely inflation target returns ahead of the Oct. 17 policy decision. The Australian dollar stayed near recent peaks following robust retail figures, while the kiwi dropped 0.5%.

(With inputs from agencies.)