US dollar near three-month peak as bets on a rate cut diminish

US dollar approached its highest level in three months on Tuesday, supported by a rise in Treasury bond yields and in light of diminishing expectations that the US Federal Reserve (the central bank) will reduce interest rates significantly this year.

According to Reuters, the dollar index, which measures the performance of the US currency against six major currencies, reached 104.42 points after touching 104.60 points on Monday, its highest level since November 14. The index has risen three percent since the beginning of the year until now, after falling 2% in 2023.

Data on Monday showed that US service sector growth rebounded in January as new orders increased and hiring rose, indicating a strong start to the year for the economy and following last week’s strong jobs report.

A string of strong US economic data has crushed any lingering hopes for early and sharp cuts in interest rates by the Federal Reserve, as bank Chairman Jerome Powell and other policymakers oppose the idea.

CME’s Fed Watch service showed that traders have reduced bets on a cut in interest rates since the beginning of the year and currently see only a 15% chance of a cut in interest rates in March, compared to a 69% chance at the beginning of the year.

They currently expect cuts of 115 basis points this year compared to about 150 basis points expected in early January.

Investors in Asia will focus on the Reserve Bank of Australia’s monetary policy decision later on Tuesday, with high expectations that the central bank will keep interest rates unchanged.

Investors adjusted bets on the Reserve Bank of Australia’s first interest rate cut to August instead of June, with economists polled by Reuters also expecting the central bank to keep interest rates unchanged until the second half of this year.

There was little change in the Australian dollar and was trading at $0.64835 before the decision, fluctuating around its lowest levels since November 17.

As for other currencies, the euro rose 0.02% to $1.0743, and the British pound reached $1.254, up 0.06% during the day, but remained close to the lowest level in seven weeks, which it reached on Monday.

The pound’s decline on Monday came despite some upbeat economic data.

The yen rose 0.07% to 148.56 per dollar, with the Japanese currency hovering around its lowest level in two months at 148.90, which it touched on Monday.