Dollar supported as bets on interest rate cuts in 2025 evaporate By Reuters

(It is correct to say that interest rate futures indicate a 94% probability of a cut, not a rise, in the fifth paragraph)

SINGAPORE (Reuters) – The dollar maintained its strength and approached recent highs on Tuesday, on the eve of an expected U.S. interest rate cut, with traders raising their long-term interest rate assumptions.

The friendless euro, which is headed for a roughly 5% decline against the dollar over the calendar year, was not far off from its lows of the year at $1.0518.

The gap between US and German ten-year bond yields is 216 basis points, and has widened by about 70 basis points in three months.

The yen was lower for the seventh straight session – and slightly weaker at 154.17 against the dollar in morning trade – as markets trimmed the chances of a Japanese interest rate hike this week and sees a move in January as more likely.

The Fed announces its interest rate decision on Wednesday, and interest rate futures point to a 94% chance of a cut, even as service sector activity jumped to a three-year high according to S&P’s Global Purchasing Managers Survey.

The Atlanta Fed’s GDP index is at 3.3% for the fourth quarter, and the strength of the economy has lifted yields and supported the dollar, as traders believe this week’s expected cut could be the last for a while.

After Wednesday’s cut, markets see a roughly 37% chance of either one 25 basis point cut or none at all during all of 2025, according to the CME FedWatch tool, up from about 21% the week before.

“I think the Fed will now be concerned about a resurgence in inflation, as the unknown policy mix and fixed rates create several paths for a return of inflation in 2025,” said Donnelly, head of Spectra Markets.

“So I think they will signal a very cautious approach going forward and rely on language that refers to concerns about inflation and a higher neutral rate.”

Besides the Fed, the Bank of Japan, the Bank of England and the Bank of Norway meet this week and are expected to remain unchanged on Thursday, while the Riksbank is expected to cut interest rates, perhaps by 50 basis points.

The pound rebounded on Monday as a survey of business activity pointed to rising prices in Britain while employment data is due for release on Tuesday, while upward pressure on wages is expected to add to the case for a cautious central bank. The British pound last bought $1.2695.

The Canadian dollar, weighed down by low interest rates and the risk of US tariffs, fell to its lowest level in four-and-a-half years on Monday as the surprise resignation of Finance Minister Chrystia Freeland put the unpopular government under more pressure.

The Australian and New Zealand dollars are holding near their lowest levels this year, although they avoided further selling due to the latest weak Chinese economic indicators on Monday, as markets bet that government spending will bail out. (Australian dollar/)

The latter settled at $0.6373 and rose to $0.5792. New Zealand increased its bond issuance expectations for the next few years and long-term yields rose.

It was under gentle pressure at 7.2918 in foreign trade, as a challenging outlook for Chinese economic growth pushed yields to record lows.