THE US dollar was just off a 2½-month high on Tuesday (Oct 22) on expectations the Federal Reserve will take a measured approach in easing its policy, while a too-close-to-call US election campaign kept investors on edge.
The dollar’s strength, boosted by rising Treasury yields, kept pressure on the yen, euro and sterling, a theme that has been building over the past few weeks as traders scale back their bets on rapid US rate cuts.
Benchmark 10-year Treasury yields rose three bps in London trade to a fresh 12-week high as investors priced for a more robust American economy.
Some analysts argued that the release of the Beige Book late on Wednesday could be the biggest threat to the greenback this week, with the previous summary of economic conditions regarded by some as the main trigger for the 50-basis-point-(bp)-rate cut in September that kicked off the Fed’s easing cycle.
Markets are pricing in an 87 per cent chance of the Fed cutting rates by 25 bps next month, versus a 50 per cent chance a month earlier, when investors saw an equal likelihood of a larger 50-bp cut, the CME FedWatch tool showed.
Traders are anticipating another 40 bps of easing overall for the rest of the year.
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“The dollar rose recently on the hawkish repricing of expectations for the Fed monetary policy and because uncertainty regarding US elections reduced risk appetite supporting safe-havens,” said Nick Andrews, strategist at HSBC.
However, US elections are still the main focus.
Markets expect the strongest dollar response from a Republican sweep, which should open the door to larger increases in trade tariffs in combination with fiscal stimulus.
A smaller rally for the greenback is seen in response to a divided Republican government outcome, while a Democratic sweep or a divided Democratic government would likely result in some initial downside.
The dollar index, which measures the US currency versus six others, was last at 103.91, having touched 104.02 on Monday, its highest since Aug 1. The index is up more than 3 per cent so far this month.
The euro last bought US$1.0827, near its lowest since Aug 2, while sterling was at US$1.3006, near its lowest since Aug 20.
Eurozone PMI data on Thursday could provide an additional downward push to the single currency if it underlines the poor economic situation in the euro area and boosts bets on future European Central Bank rate cuts.
ECB speakers will also be in focus after President Christine Lagarde delivered a dovish message last week.
“The key question is: are the hawks fine with Lagarde’s sanguine disinflation view, a gradual shift in focus to growth and such a dovish market pricing?” said Francesco Pesole, forex strategist at ING.
“Given some lingering pockets of sticky services inflation in the eurozone, the answer is probably no.”
With the US election just two weeks away, the rising odds of former President Donald Trump winning are boosting the dollar, since his proposed tariff and tax policies are seen as likely to keep US interest rates high.
“Even small changes in tight polls could drive seemingly erratic swings in market sentiment,” said Antti Ilvonen, forex analyst at Danske Bank.
The yield on the benchmark US 10-year Treasury note rose to its highest since Jul 26 at 4.22 per cent.
That weighed on the yen, which was roughly unchanged at 150.88, after touching a near three-month low of 151.10 per dollar.
The Bank of Japan is carefully looking at the upside risks from rising import prices as the yen weakens, Executive Director Takeshi Kato was quoted as saying by Jiji Press on Tuesday.
The yen weakness comes with Japan set to conduct a general election on Oct 27. While opinion polls vary on how many seats the ruling Liberal Democratic Party (LDP) will win, markets have been optimistic that the LDP, along with junior coalition partner Komeito, will prevail.
Barclays expects a suppression of pricing of BOJ rate hikes and an increase in fiscal concerns, driving the yen higher if the LDP/Komeito coalition has to form a government with additional coalition partners.
It also forecasts that in the unlikely event (tail risk scenario) of the LDP and its coalition partner Komeito being unable to form a government, risk-off moves could drive a sudden 2 per cent drop in the dollar/yen exchange rate. REUTERS
