Fed outlook pushes dollar to 2 1/2 month peak; yen under pressure

By Brigid Riley

TOKYO (Reuters) - The U.S. dollar hovered at a 2-1/2-month peak on Wednesday as investors adjusted bets toward a gradual reduction of interest rates while keeping an eye on a close presidential election race.

The yen remained under pressure as the dollar and U.S. Treasury yields marched higher, pushing it to a three-month low.

The greenback has climbed for three weeks as expectation for aggressive rate hikes from the Federal Reserve has faded after a slew of upbeat economic data.

Markets now have a 91% chance priced in for a moderate quarter-basis-point cut in November, the CME FedWatch tool showed. A month earlier, investors were split between bets for 50 basis points.

That less dovish outlook for the Fed has helped buoy Treasury yields. The yield on the benchmark 10-year note hit its highest since July 26 at 4.222% on Tuesday.

Amid an otherwise light calendar for economic data on Wednesday, the stand-out event is the release of the Fed's Beige Book summary of economic conditions.

The last Beige Book pointed to decelerating economic growth with isolated strengths, a pattern likely to be repeated in October's report, said senior market analyst Matt Simpson at City Index. However, an upside surprise seems more likely given recent data has outperformed forecasts, he said.

"Still, the USD index and U.S. yields only posted marginal gains on Tuesday, which suggest bulls should tread with caution, especially if we see the two-year moves back below 4%."

The dollar index, which measures the U.S. currency against six others, was last up 0.11% at 104.18 after ticking up to 104.19, its highest since Aug. 2. The index is up more than 3% so far this month.

With weeks to go before votes are tallied in the presidential election, investors have been weighing the risk of a Republican sweep - widely expected to be the most bullish election scenario for the greenback.

In a new Reuters/Ipsos poll, Democratic U.S. Vice President Kamala Harris held a marginal 46% to 43% lead over Republican former President Donald Trump.

Markets nevertheless appear to be pricing in a Trump win but there's still "plenty of time" to reprice, said City Index's Simpson.

"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."

The rise in U.S. Treasury yields kept the heat on the yen which sank to a three-month low of 151.72 against the greenback.

Japan is set to hold a general election on Oct. 27. Recent opinion polls indicated that the ruling Liberal Democratic Party could lose its majority with coalition partner Komeito.

The risk of a minority coalition government has raised the prospect of political instability complicating the Bank of Japan's effort to reduce dependence on monetary stimulus. 

Elsewhere, the euro was last at $1.0794 after sliding to its lowest since Aug. 2 at $1.0792. European Central Bank policymakers joined forces on Tuesday to flag the risk of inflation falling below the bank's 2% target.

Sterling was at $1.2976 after falling to its lowest since Aug. 19 of $1.2945 in the previous session. 

In cryptocurrencies, bitcoin shed 0.33% to $67,254.00.

(Reporting by Brigid Riley; Editing by Christopher Cushing)