The dollar has rallied this week as traders began to question how aggressive the Federal Reserve's path of rate cuts will be compared with its global peers.

The Bloomberg Dollar Spot Index rose for a fourth straight session on Thursday, its longest winning streak in a month. Traders are now focused on Friday’s monthly U.S. jobs report, which is expected to show the labor market is cooling more slowly than initially thought.

Kathleen Brooks, head of research at forex broker XTB, said: “The risk of a stronger September jobs report has increased, which could lead to greater volatility than usual in U.S. stocks and the dollar. High risk aversion coupled with a U.S. jobs report is a volatile combination.”

Uncertainty surrounding the path of the Federal Reserve's rate cuts and the U.S. election has led traders to be cautious about taking a stance on the dollar. That makes its recent rebound more about rival currencies.

Selling in major currencies such as the pound and yen supported the dollar's intraday strength. The pound fell more than 1% against the dollar on Thursday after Bank of England Governor Bailey hinted at more aggressive monetary easing if inflation remains subdued. The yen extended losses after new Japanese Prime Minister Shigeru Ishiba shocked markets on Wednesday by saying the Japanese economy is not ready for another rate hike.

"We have been saying that the dollar looks cheap and oversold and is bound to bounce higher as attention shifts from the U.S. to the rest of the world," said Jayati Bharadwaj, currency strategist at TD Securities. "With U.S. economic data stabilizing and data from the rest of the world slowing, it prompts us to reassess the trajectory of rate cuts from central banks in these economies."

The dollar was also supported by a sharp escalation in conflict in the Middle East. Iran fired about 200 ballistic missiles at Israel on Tuesday following an Israeli attack on Lebanon, prompting Israeli Prime Minister Benjamin Netanyahu to vow retaliation. The dollar typically rises during periods of geopolitical stress as investors seek refuge in U.S. assets.

“Safe-haven buying and the fact that the U.S. economy is not in trouble is boosting the dollar,” said Helen Given, a foreign exchange trader at Monex Inc.

The article is forwarded from: Jinshi Data