Forex
Dollar drops to two-week low as investors take profit on ‘Trump trades’
By Medha Singh and Wayne Cole
(Reuters) -The dollar dipped on Monday as investors braced for wide-ranging implications for the global economy this week from the outcome of U.S. elections and a likely interest rate cut from the Federal Reserve.
The euro jumped 0.7% to $1.0906. The dollar fell nearly 1% on the yen to 151.645. The eased to 103.65, its lowest in two weeks against a basket of currencies.
U.S. Treasury yields dropped 8 basis points (bps), retracing some of Friday’s surge. [US/]
Democratic candidate Kamala Harris and Republican Donald Trump remain almost tied in opinion polls and the winner might not be known for days after voting ends.
Investors in recent weeks increasingly positioned for a Trump win, and expected his policies on immigration, tax cuts and tariffs to put upward pressure on inflation, bond yields and the dollar. Harris is seen as the continuity candidate.
Strategists said the dollar weakness on Monday was linked to a poll that showed Harris with a surprise three-point lead in Iowa. A separate New York Times/Siena College poll showed Harris was marginally ahead in Nevada, North Carolina and Wisconsin and Trump just ahead in Arizona, among the handful of battleground states where the election is most competitive.
“The polls suggesting that Harris may have her nose in front in couple of swing states is causing a bit of profit-taking in the Trump trade,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale (OTC:).
“Markets are very stretched – long dollars, short Treasuries – into the vote tomorrow so it’s only natural we are adjusting some of that positioning.”
Betting site PredictIT showed Harris at 53 cents and Trump on 52 cents – what investors are willing to wager for a chance to win $1 – a turnaround from 45 cents and 59 cents respectively, just a week ago.
“It’s certainly one of the most uncertain U.S. elections compared to recent ones,” said Roberto Mialich currency strategist at UniCredit, referring to positioning in the options market that showed investors were buying protection against wild swings following Tuesday’s vote.
“The risk that we may not have a black and white result as early as Wednesday is adding to the uncertainty.”
The one-week implied volatility options for euro/dollar was at the highest since March 2023.
Reflecting investor anxiety over trade relations, implied volatility for China’s , seen on the frontline of markets’ reaction to the U.S. election, was at a record high, while that for dollar/Mexican peso was at the highest since April 2020, surpassing the previous election cycle.
PRICED FOR 25BP
This week also includes the Fed’s policy meeting when the U.S. central bank is widely expected to cut rates by a standard 25 basis points on Thursday, rather than repeat the outsized half-point easing of its last decision.
Traders see a 98% chance of a quarter point cut to 4.50%-4.75%, and a near 80% probability of a similar sized move in December, according to CME’s FedWatch tool.
“We are pencilling in four more consecutive cuts in the first half of 2025 to a terminal rate of 3.25%-3.5%, but see more uncertainty about both the speed next year and the final destination,” said Goldman Sachs economist Jan Hatzius.
“Both our baseline and probability-weighted forecasts are now a bit more dovish than market pricing.”
The Bank of England also meets Thursday and is expected to cut by 25 basis points, while the Riksbank is seen easing by 50 basis points and the Norges Bank is expected to stay on hold.
The Reserve Bank of Australia holds its meeting on Tuesday and again is expected to hold rates steady.
The BoE’s decision has been complicated by a sharp selloff in gilts following the Labour government’s budget last week, which also dragged the pound lower.
Early Monday, UK bonds stabilised and sterling regained some of its losses to stand at $1.29820. [GB/]
More stimulus is also expected from China’s National People’s Congress, which is meeting from Monday through Friday.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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