Dollar Rising on Forex Market Due to US Rates and Presidential Elections
The U.S. dollar narrowly retreated from a 2-1/2-month high on Tuesday amid expectations the Federal Reserve would take a measured approach to easing policy, while a close-to-expected U.S. election campaign kept investors on edge.
A stronger dollar, underpinned by rising Treasury yields, continued to weigh on the yen, euro and pound sterling, a theme that has been building in recent weeks as traders trimmed their bets on a rapid rate cut in the US.
The yield on 10-year Treasury notes rose 3 basis points in London to a fresh 12-week high as investors bet on a stronger U.S. economy.
Some analysts say Wednesday night's Beige Book release could be the biggest threat to the U.S. dollar this week. The earlier summary of economic conditions is seen by some as the main impetus for the 50 basis point (bp) interest rate cut in September, which marked the start of the Fed's easing cycle.
Markets are pricing in an 87% chance of the Fed cutting rates by 25 basis points next month, up from 50% a month earlier, when investors saw a similar chance of a larger 50 basis point cut, according to the CME FedWatch tool.
Traders expect another 40 basis points of easing by the end of the year (FEDWATCH).
"The US dollar has recently risen on the back of a hawkish reassessment of Fed monetary policy expectations and as uncertainty over the US election has dampened risk appetite, fuelling a surge in safe-haven assets," said Nick Andrews, strategist at HSBC.
However, the focus remains on the US election, with markets expecting the strongest dollar response from the Republicans, which should pave the way for a more significant hike in trade tariffs coupled with fiscal stimulus.
The U.S. dollar's appreciation is expected to be less pronounced in response to a split Republican government, while a Democratic victory or a split Democratic government is likely to result in some initial weakness.
The DXY dollar index, which measures the U.S. currency against six other currencies, was last at 103.91, having reached 104.02 on Monday, its highest since Aug. 1. The index has gained more than 3% since the start of the month.
The euro EURUSD was last bought at $1.0827, close to its lowest since August 2, while the pound sterling GBPUSD was at $1.3006, close to its lowest since August 20.
Eurozone purchasing managers' index (PMI) data due on Thursday could weigh further on the single currency if it highlights the weak economic outlook in the eurozone and strengthens bets on a future interest rate cut by the European Central Bank.
ECB speakers will also be in focus after President Christine Lagarde issued a dovish message last week.
“The big question is: are hawks comfortable with Lagarde’s optimistic disinflation outlook, gradual shift to growth and such soft pricing in the market?” said Francesco Pesole, currency strategist at ING. “Given the persistence of pockets of sticky inflation in the eurozone’s services sector, the answer is likely to be ‘no’.”
With just two weeks left until the US election, the rising odds of a victory for former President Donald Trump are helping to boost the dollar as his proposed tariff and tax policies are likely to keep US interest rates high.
"Even small changes in strict surveys can lead to seemingly volatile swings in market sentiment," said Antti Ilvonen, currency analyst at Danske Bank.
The yield on benchmark 10-year U.S. Treasury notes US10Y rose to its highest since July 26 at 4.22%. That weighed on the yen USDJPY, which was little changed at 150.88 after hitting a near three-month low of 151.10 per dollar.
Bank of Japan Executive Director Takeshi Kato said on Tuesday that the BOJ is closely examining the risks of rising import prices amid a weaker yen, Jiji Press reported.
The yen's weakness comes as Japan holds a general election on October 27. Although opinion polls are divided on how many seats the ruling Liberal Democratic Party will win, markets are optimistic that the LDP and junior coalition partner Komeito will win.
Barclays expects the price containment from the Bank of Japan's interest rate hike and rising fiscal concerns to push the yen higher if the LDP/Komeito coalition is forced to form a government with additional coalition partners. It also forecasts that in the unlikely event that the LDP and its coalition partner Komeito fail to form a government, the risk-off could lead to a sudden 2% drop in the dollar-yen exchange rate.