SINGAPORE- The dollar held firm and near recent peaks on Tuesday, on the eve of an expected interest rate cut in the United States, as traders have ratcheted long-term rate assumptions higher.
The friendless euro which is heading for a calendar-year drop of nearly 5 percent on the dollar, was not far from recent troughs and traded at $1.0509 in the Asia session with markets in a holding pattern ahead of the Fed decision.
The gap between US and German ten-year yields is 216 basis points and has widened nearly 70 bps in three months
The yen was steady at 154.06 per dollar, after six straight days of selling as markets have pared chances of a Japanese rate hike this week in favor of a move in January.
The Federal Reserve announces its interest rate decision on Wednesday and interest rate futures imply a 94 percent chance of a cut, even as services-sector activity leapt to a three-year high according to an S&P Global purchasing managers survey.
The Atlanta Fed’s GDP Now indicator is running at 3.3 percent for the fourth quarter and the strength of the economy has been lifting yields and supporting the dollar as traders figure that the neutral setting for rates may be higher than first thought.
Fed officials’ median long-run interest rate projection was 2.9 percent in September. Market pricing implies almost no chance of rates being that low by December next year and only a 30 percent of the Fed Funds rate falling below 3.75 percent by the end of 2025.
“I think the Fed will now be worried about a resurgence of inflation as an unknown policy mix and sticky prices create many paths for inflation to make a comeback in 2025,” said Brent Donnelly, president at Spectra Markets.
“And therefore I think they will signal a very cautious approach going forward and lean on language that suggests concerns about inflation and a higher neutral rate.”
