Key points:

  • The rising US dollar is weighing on the Japanese yen and euro.
  • Fed easing: 25 basis point rate cut expected next month, 50 basis point rate cut in September.
  • Gold prices rise amid Middle East instability, US elections.

Gold prices hit an all-time high on Wednesday, while the US dollar rose, weighing on the Japanese yen and euro. Asian stock markets were marginally higher as investors held off on big bets ahead of the tense US presidential election.

A change in expectations about the pace and extent of interest rate cuts by the Federal Reserve has also weighed on investor appetite, with traders now expecting the US central bank to be more cautious in its monetary policy.

Equity markets show uncertainty

A rise in U.S. Treasury yields to a three-month high helped strengthen the U.S. dollar, which has hit multi-month highs against the euro, sterling and the yen. The latter has returned to 150 yen per dollar, raising concerns among Japanese regulators.

MSCI’s broad-based index of Asia-Pacific shares showed modest gains, but Japan’s Nikkei index fell 1% ahead of the weekend election. Chinese and Hong Kong stocks rose on promises of government support for the economy, although the details of those measures have yet to be finalized.

European markets were moderately positive, with major index futures little changed.

K2 Asset Management’s George Bubouras said the strong U.S. economy and continued government spending suggest the coming monetary easing cycle is shallow.

Traders’ rate cut forecasts

Markets are currently pricing in a 41 basis point cut in the Federal Reserve’s key rate this year and another 100 basis points next year. Traders had been expecting a 25 basis point cut next month, but expectations for further monetary easing have been adjusted downwards following the release of strong macroeconomic data. The Fed had already cut rates by 50 basis points in September, kicking off a new easing cycle.

Expectations of a moderate pace of rate cuts have led to a strengthening of the US dollar. The dollar index hit its highest since August 2, reflecting increased demand for the American currency. The Japanese yen weakened to a three-month low against the dollar, while the euro also fell to its lowest since early August.

Commodity markets are seeing a rise in gold prices, which have reached a record high. Conflict in the Middle East, uncertainty over the Federal Reserve’s monetary policy and the upcoming US elections are driving demand for gold as a safe haven. Oil prices, on the other hand, have eased slightly after their recent sharp rise, although they remain at relatively high levels.

US presidential election affects investor sentiment

Investors are paying particular attention to the US election and a possible Donald Trump presidency, as his policies, including tariffs and measures to combat illegal immigration, could fuel inflation. This, in turn, is supporting the dollar amid expectations that US interest rates may remain high for longer than previously thought.

The likelihood of a Trump victory over Democratic challenger Vice President Kamala Harris has recently increased on betting platforms, although polls suggest the race for the presidency remains too close to be accurately predicted. With less than two weeks to go until the November 5 election, investors are bracing for potential volatility in financial markets.

Trump’s improved chances of winning also lower market expectations for continued Fed easing in 2025, and there is a chance the Fed will temporarily take a back seat for six months next year.