Betting on the "Trump" market is becoming increasingly crazy, with the US dollar approaching a two-year high

According to the Zhitong Finance and Economics APP, the US dollar hovered near a two-and-a-half-month high in Wednesday's trading, poised to achieve its best monthly performance since 2022, thanks to traders reassessing the Fed's policy expectations and preparing for the presidential election that could impact the macroeconomy. Despite the diminishing expectations of a significant rate hike by the Fed, the dollar has risen for three consecutive weeks, with a 91% chance in the market predicting a quarter-point rate cut in November. The dovish outlook of the Fed has weakened, driving up US Treasury yields, with the 10-year Treasury yield hitting its highest level since July 26 at 4.222%.

It is understood that the Fed's "Beige Book" released on Wednesday became the most watched economic event, expected to summarize the economic situation of slowing growth but with some improvements in individual indicators. The slight rise in the US dollar index and US yields indicates a cautious stance in the market towards further rate hikes. The US dollar rose against all G10 currencies, in line with the steady increase in bond yields, with the USD/JPY exchange rate falling below the 153 level, while the euro and pound fell for the third consecutive trading day.

As the election approaches, investors are weighing the risks of a Republican landslide victory, which is considered the most favorable election outcome for the US dollar. Although Democratic Vice President Kamala Harris leads by a slight margin in the latest opinion polls, the market seems to have already priced in the possibility of a Trump victory.

At the same time, the rise of the US dollar also reflects market concerns about turmoil and expectations of further appreciation of the dollar during Trump's term, prompting investors to seek relatively safe US assets.

Jordan Rochester, a strategist at RBC, pointed out that the market is "continuously buying the US dollar to an extremely uneconomical extent," and the cost of hedging against future dollar volatility is continuously rising, reaching the highest level in 19 months. In addition, speculative forex traders have largely eliminated bearish expectations for the dollar, with the one-month risk reversal rate for the dollar hovering near the highest level since July.

The swap market shows that traders expect the Fed to cut rates by about 40 basis points at the next two meetings, compared to expectations of over 65 basis points in early October.

Skylar Montgomery-Koning, a forex strategist at Barclays Bank, stated that due to the US economic growth exceeding its potential, the dovish expectations of the Fed have now faded, and the market is questioning whether there will be consecutive rate cuts.

It is worth mentioning that the rise in US Treasury yields has put pressure on the yen, with the GBP/USD exchange rate falling to a three-month low of 151.72.

Japan's general election will be held on October 27, with opinion polls showing that the ruling Liberal Democratic Party may lose a majority, increasing the possibility of political instability.

European Central Bank policymakers have warned that inflation may fall below the bank's 2% target, while the GBP/USD exchange rate has fallen to its lowest level since August 19 at $1.2945