Before the election, the dollar declines; the Fed and BOE are also under scrutiny

The U.S. dollar experienced a decline on Monday due to political uncertainty ahead of Tuesday's presidential election and expectations of an interest rate cut by the Federal Reserve later this week.

As of 04:10 ET (09:10 GMT), the Dollar Index, which measures the dollar against a basket of six other currencies, dropped 0.5% to 103.695, following strong gains in October.

Dollar Weakens Ahead of Presidential Election
This week, the spotlight is on the crucial U.S. presidential election, with a tightly contested race between Republican candidate Donald Trump and Democratic challenger Kamala Harris. Harris gained momentum from a respected poll in Iowa—a traditionally conservative state—showing her leading Trump by three percentage points, significantly due to support from women.

“Markets seem to be scaling back some Trump-related trades,” noted analysts at ING, suggesting that the next couple of days may witness unusual fluctuations in USD pairs due to increased volatility leading up to the closely watched election.

Analysts predict that Trump's policies on immigration, tax cuts, and tariffs could drive inflation, bond yields, and the dollar higher.

Additionally, traders are bracing for a 25 basis point cut by the Fed following its two-day policy meeting concluding on Thursday. This comes on the heels of a substantial 50-basis point reduction in September.

Recent nonfarm payrolls data revealed a significant slowdown in job creation for October, although this was influenced by hurricanes and labor disputes.

“Absent the election context, we would have considered a Fed cut as likely negative for the dollar. However, the effects on foreign exchange markets will only become clear once the election-induced volatility subsides,” ING added.

Euro Strengthens Amid Positive Eurozone Data
In Europe, EUR/USD rose 0.5% to 1.0892, benefiting from dollar weakness and relatively positive data. The final eurozone manufacturing PMI showed an increase to 46.0 in October, up from 45.0 in September. While this indicates continued contraction in the sector, there are signs of improvement on the horizon.

“Markets have moderated some dovish expectations for the European Central Bank following recent growth and inflation data, though they may consider the possibility of a 50 basis point cut in December should Trump win this week,” ING commented. “This is based on the belief that the ECB might be more inclined to preemptively ease monetary policy in light of potential protectionist measures under Trump.”

GBP/USD climbed 0.3% to 1.2963, recovering from last week’s losses following the new Labour government's budget announcement. The Bank of England is also scheduled to meet on Thursday, with an expected cut of 25 basis points. However, this decision is complicated by a sell-off in gilts after last week's budget.

“Markets will likely focus more on the Monetary Policy Committee’s insights regarding the budget, as the Office for Budget Responsibility anticipates that the proposed fiscal measures will be both growth-promoting and inflationary,” ING added.

Yen Recovers from Three-Month Lows
USD/JPY fell 0.6% to 152.11, retreating from recent three-month highs as a result of dollar weakness. The yen gained support from a somewhat hawkish message from the Bank of Japan last week.

Meanwhile, USD/CNY decreased by 0.3% to 7.1009, with attention shifting to the Standing Committee of the National People's Congress (NPC) that convenes on Monday. The NPC is expected to announce plans for increased fiscal spending, with reports suggesting it could authorize an additional $1.4 trillion in debt over the coming years.

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.