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Dollar skids ahead of US election, likely Fed rate cut
The dollar slid in Asia on Nov. 4 as investors braced for a potential pivot this week for the global economy as the United States chooses a new leader, and as it likely cuts interest rates again with major implications for bond yields.
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U.S. dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration/File Photo / Reuters
The dollar slid in Asia on Nov. 4 as investors braced for a potential pivot this week for the global economy as the United States chooses a new leader, and as it likely cuts interest rates again with major implications for bond yields.
The euro extended an early climb to be up 0.6 percent at US$1.0901 and looked set to test resistance around US$1.0905. The dollar fell 0.9 percent on the yen to 151.60 and threatened support at 151.45. The dollar index eased 0.3 percent to 103.63.
Treasury futures rallied a solid 12 ticks, recovering some of the losses suffered on Nov. 1. [US/]
Democratic candidate Kamala Harris and Republican Donald Trump remain virtually tied in opinion polls and the winner might not be known for days after voting ends.
Analysts believe Trump's policies on immigration, tax cuts and tariffs would put upward pressure on inflation, bond yields and the dollar, while Harris was seen as the continuity candidate.
Dealers said the early dip in the dollar might be linked to a well-respected poll that showed Harris taking a surprise 3-point lead in Iowa, thanks largely to her popularity with female voters.
"Since last week, Harris is seeing a boost in the polls, highlighted by the Selzer Poll of Iowa where some are using as a proxy for performance among the Blue Wall battleground states," analysts from JPMorgan said in a note.
Betting site PredictIT showed Harris at 54 cents to Trump on 52 cents - what investors are willing to wager for a chance to win US$1 - compared to 42 cents to 61 cents just a week ago.
"It is widely considered that a Trump win will be positive for the USD, though many feel this outcome has been discounted," said Chris Weston, an analyst at broker Pepperstone. "A Trump presidency with full control of Congress could be most impactful, as one would expect a solid sell-off in Treasuries resulting in a spike higher in the USD."
"A Harris win and a split Congress would likely result in 'Trump trades' quickly reversed and priced out," he added. "The USD, gold, bitcoin and U.S. equity would likely head lower."
PRICED FOR 25BP
Uncertainty over the outcome is one reason markets assume the Federal Reserve will choose to cut rates by a standard 25 basis points on Nov. 8, rather than repeat its outsized half-point easing.
Futures imply a 99 percent chance of a quarter-point cut to 4.50 percent-4.75 percent, and an 83 percent probability of a similar-sized move in December.
"We are pencilling in four more consecutive cuts in the first half of 2025 to a terminal rate of 3.25 percent-3.5 percent, 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 Nov. 8 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 Nov. 5 and again is expected to hold rates steady.
The BoE's decision has been complicated by a sharp sell-off in gilts following the Labour government's budget last week, which also dragged the pound lower.
Early Nov. 4, sterling had regained some of its losses to stand at US$1.2994, some way from last week's trough at US$1.2841. [GB/]
More stimulus is also expected from China's National People's Congress, which is meeting from Nov. 4 through Nov. 9.
Sources told Reuters last week that Beijing is considering approving next week the issuance of more than 10 trillion yuan (US$1.40 trillion) in extra debt in the next few years to revive its fragile economy.
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