The US dollar hovered at a 2-1/2-month peak on Wednesday as investors adjusted their expectations towards a more gradual reduction in interest rates. This comes amid a close presidential election race in the United States, adding to the uncertainty.

The greenback has been on an upward trend for three weeks, buoyed by a shift in sentiment regarding the Federal Reserve's rate hike path. Investors' hopes for aggressive rate increases have faded following strong economic data.

Markets have now priced in a 91% chance of a quarter-basis-point rate cut in November, according to the CME FedWatch tool. A month ago, opinions were split between a 50-basis-point and a smaller cut. This less dovish outlook for the Fed has also helped push U.S. Treasury yields higher.

The yield on the benchmark 10-year note climbed to 4.222% on Tuesday, marking its highest level since July 26. This rise in Treasury yields has kept the yen under pressure, driving it to a three-month low of 151.72 against the dollar.

In terms of the broader market, the dollar index, which measures the U.S. currency against six major counterparts, was last up 0.11% at 104.18, following a rise to 104.19, its highest since 2 August. The index has gained over 3 per cent this month alone.

Meanwhile, the euro was last seen at US$1.0794, having dipped to its lowest since 2 August at US$1.0792. On Tuesday, European Central Bank policymakers highlighted the risk of inflation falling below their 2 per cent target. Sterling stood at US$1.2976 after dropping to US$1.2945 in the prior session, its lowest since 19 August.

Senior market analyst Matt Simpson of City Index commented on the Federal Reserve's Beige Book summary of economic conditions, which is due to be released later on Wednesday. He noted, "The last Beige Book pointed to decelerating economic growth with isolated strengths, but an upside surprise seems more likely given recent data outperformed forecasts."

"Still, the US$ index and US yields only posted marginal gains on Tuesday, which suggest bulls should tread with caution, especially if we see the two-year move back below 4%," Simpson added.

As the US election approaches, investors are weighing the potential impact of a Republican sweep, which is widely regarded as the most bullish scenario for the dollar. A new Reuters/Ipsos poll shows Democratic US Vice President Kamala Harris holding a narrow 46% to 43% lead over Republican former President Donald Trump. However, Simpson said, "Markets appear to be pricing in a Trump win, but there's still plenty of time to reprice."

"We might even see a bit of a pullback on the mighty dollar and yields if markets price in a Harris win, given her policies are deemed less inflationary," he noted.

In cryptocurrencies, Bitcoin slipped by 0.33%, trading at US$67,254.

Japan, meanwhile, is preparing for a general election on Oct 27. Recent opinion polls suggest the ruling Liberal Democratic Party may lose its majority with coalition partner Komeito. The potential for a minority coalition government has raised concerns about political instability, which could complicate the Bank of Japan's plans to reduce its reliance on monetary stimulus.

Reuters