The US dollar is at a seven-week high against other major currencies. This comes after a strong US jobs report made expectations of an interest rate cut less likely. In addition, escalating tensions in the Middle East increased demand for safe-haven assets such as the dollar.
The market is now pricing in an 86% chance of a small cut (25 basis points) from the Fed in November. Expectations for a December rate cut have also diminished significantly.
This helped the US dollar maintain its strength against the euro, pound and yen. However, the yen recovered slightly as rising geopolitical tensions sent money flowing into safe-haven assets.
The Dollar Index, which measures the value of the US dollar against other major currencies, is currently at 102.38, near a seven-week high.
Another reason for the dollar's strength is that the US labor market remains strong, while inflation has begun to cool. The Fed is expected to make only small rate cuts in the near future.
The yield on the 10-year US Treasury note has also risen above 4%, reflecting that traders are no longer expecting big rate cuts.
Investors' focus this week will be on Thursday's inflation report as well as the minutes of the Fed's September meeting due out on Wednesday.
“We don’t see the conditions for a recession and believe the economy remains in relatively good shape despite the current slowdown,” said Steve Boothe, portfolio manager in the fixed income division at T. Rowe Price.
"We expect the Fed to cut rates two more times by 25 basis points each this year, for a total of six cuts next year."
