The dollar has eased from nearly seven-week highs against major currencies on Tuesday as investors recalibrate their expectations around U.S. Federal Reserve rate cuts. Despite ongoing conflicts in the Middle East bolstering the dollar's safe-haven appeal, traders are becoming increasingly cautious.

The euro rose slightly by 0.1% to $1.0986, remaining in close proximity to last week’s seven-week low of $1.0951. The British pound similarly inched up 0.1% to $1.3101, recovering from a three-week low of $1.3059 observed on Monday.

A significant factor influencing this shift is a stronger-than-expected jobs report from last week, supporting Fed Chair Jerome Powell’s assertion that the central bank plans to continue with moderate quarter-percentage-point rate reductions following a major cut initiated in September. As Nick Rees, a senior FX market analyst at Monex Europe explains, “The market's perception has changed; it seems that traders no longer anticipate a 50 basis point cut from the Fed anytime soon, and fears of a U.S. recession this year are fading.”

In line with these sentiments, Federal Reserve Bank of New York President John Williams stated in a recent interview that the September rate cut should not be viewed as a precedent for future actions, implying a more cautious approach ahead.

Market Pricing Insights

As the CME FedWatch tool indicates, markets are currently not fully factoring in a rate cut in November but are estimating a 90% probability of a 25-basis-point reduction. Predictions for a total of 50 basis points easing by December have also decreased from over 70 basis points just one week ago.

This reevaluation has led the dollar to attain multi-week highs against other currencies such as the euro and the pound, although the yen has incrementally regained strength amid rising geopolitical uncertainties that typically drive investors towards safe-haven assets like the dollar. The dollar index, which gauges the U.S. currency against major rivals, dipped 0.1% to 102.38.

Rees highlighted that potential adjustments in the dollar may hinge on upcoming inflation data. “The upcoming Consumer Price Index (CPI) report could spark another surge in the USD, especially if the Federal Reserve adopts a more hawkish stance,” he added.

Investor sentiment is particularly focused on the inflation report scheduled for Thursday and the release of minutes from the Fed's September meeting set for Wednesday. According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, “If the CPI report is soft, it might soothe Fed doves and stabilize the dollar. Conversely, a strong reading could reignite cut expectations, pushing yields higher and leading to a stronger dollar.”

The benchmark 10-year U.S. Treasury yield has remained above 4%, reaching this threshold for the first time in two months as traders curb their expectations for significant rate cuts.

In other developments, the Chinese yuan has depreciated against the dollar, trading at 7.0552 per dollar, while the stock markets opened robustly following a week-long holiday only to close lower later in the session due to rising skepticism about stimulus measures.

Meanwhile, the yen modestly recovered by 0.2%, trading at 147.87 per dollar, after tumbling to a seven-week low of 149.10 amidst remarks from new Japanese Prime Minister Shigeru Ishiba, who expressed concerns about the economic capacity for further rate hikes in the near term. Ishiba's comments have thrown uncertainty into the Bank of Japan's policy outlook, which starkly contrasts with his earlier endorsements for unwinding extreme monetary stimulus.

In Australia, the dollar fell to its lowest level since September 16 at $0.6715 as the central bank's recent minutes appeared dovish, closing down 0.4% at $0.67345.

Stay alert for further developments as global markets navigate the complex interplay of monetary policy and geopolitical tensions.