The dollar edged closer to a two-and-a-half-month high on Tuesday, as investors were expected to take a measured approach to cutting interest rates, while a tight race in next month's U.S. presidential election kept investors on edge.
The dollar, boosted by higher Treasury yields, continued to weigh on the yen, euro and pound, a trend that has intensified over the past few weeks as data showed the U.S. economy remains in good shape, reducing bets on rapid and aggressive U.S. interest rate cuts.
Four Federal Reserve policymakers on Monday expressed support for further interest rate cuts, though they differed on the speed of cuts and the target range.
The divergent views give a glimpse of what we can expect at the Federal Reserve's next policy meeting on November 6-7.
Markets see an 89 percent chance of a 25 basis point rate cut at the next meeting, up from a 50 percent chance last month.
The dollar index, which measures the greenback against six major currencies, was at 103.93 in Asian trade, after hitting 104.02 on Monday, its highest since Aug. 1. The index is on track to gain more than 3 percent this month.
The euro was last at $1.08205, close to its lowest since Aug. 2, while the pound was at $1.3006, close to its lowest since Aug. 20.
With the US presidential election due in two weeks, the dollar has been supported by the growing likelihood that former President Donald Trump will win the November 5 election, as Trump's proposed tariff and tax policies are likely to keep US interest rates high.
However, the race remains very close and the outcome of the election is unpredictable, with analysts expecting volatility as investors assess the situation ahead of the results.
“With a Trump win, we can expect a somewhat turbulent environment with a lot of uncertainty,” strategists at PineBridge Investments said in a note, according to Reuters.
While a Trump win could be seen as a short-term tailwind for markets, the longer-term picture looks quite different... In a way, we view a Harris win as a continuation of the 'status quo' and current policies, and implies a slower process of policy shifts, the note added.
In Asian trading, the yield on the benchmark 10-year US Treasury note rose to its highest level since July 26 and was last traded at 4.218 percent.
The rise in yields weighed on the Japanese currency, which is highly sensitive to moves in Treasury bonds. The yen touched a near three-month low of 151.10 against the dollar on Tuesday.
The yen's decline comes as Japan prepares to hold a general election on Oct. 27. While opinion polls vary on how many seats the ruling Liberal Democratic Party will win, markets have been optimistic that it, along with its junior coalition partner Komeito, will secure a victory.
