The dollar weakened on Monday as investors prepared for a potentially significant shift in the global economic landscape, marked by the upcoming U.S. presidential election and the likely announcement of further interest rate cuts, which could have substantial effects on bond yields.
The euro gained momentum, rising 0.5% to $1.0891 and approaching resistance at $1.0905. Meanwhile, the dollar slipped 0.6% against the yen, trading at 152.60, and the dollar index dipped 0.1% to settle at 103.80. U.S. Treasury yields fell by 5 basis points, reversing some of the increases seen last Friday.
Current opinion polls show Democratic candidate Kamala Harris and Republican Donald Trump nearly neck and neck, with the outcome potentially remaining unclear for several days post-election. Analysts predict that a Trump victory could lead to heightened inflation and bond yields, given his policies on immigration, tax cuts, and tariffs. In contrast, Harris is viewed as a candidate of continuity.
The dollar’s decline may be attributed to a recent poll indicating Harris’s unexpected 3-point lead in Iowa, fueled largely by her appeal among female voters. “Markets are seemingly scaling back some Trump trades, and we anticipate unusual fluctuations in USD pairs over the next couple of days due to increased volatility leading up to this tightly contested election,” noted Francesco Pesole, an FX strategist at ING.
Betting platforms such as PredictIT reflected the shifting sentiments, showing Harris at 53 cents to Trump’s 52 cents—compared to last week’s figures of 45 cents to 59 cents. “A Trump win is broadly expected to boost the USD, but many believe this scenario has already been priced in,” stated Chris Weston, an analyst at Pepperstone. He added that a Trump presidency with a fully controlled Congress could trigger a significant sell-off in Treasuries, pushing the dollar higher. Conversely, a Harris victory coupled with a divided Congress might reverse “Trump trades,” leading to declines in the dollar, gold, bitcoin, and U.S. equities.
Rate Cut Expectations
The uncertainty surrounding the election outcome is contributing to market assumptions that the Federal Reserve will opt for a standard 25 basis point rate cut on Thursday, rather than a more aggressive half-point reduction. Traders have fully incorporated this quarter-point cut, bringing rates down to the range of 4.50% to 4.75%, with an 83% chance of a similar cut in December.
Goldman Sachs economist Jan Hatzius indicated that while the firm anticipates four consecutive cuts in the first half of 2025, there is increased uncertainty regarding both the pace of these cuts and the final target rate. “Both our baseline and probability-weighted forecasts are now slightly more dovish than market expectations,” he noted.
On the same day, the Bank of England (BoE) is also expected to cut rates by 25 basis points, while Sweden’s Riksbank might opt for a 50 basis point reduction. The Norges Bank is projected to maintain its current rates, and the Reserve Bank of Australia is anticipated to hold rates steady in its upcoming meeting.
The BoE’s decision comes in the wake of a sharp sell-off in British gilts following the Labour government’s budget announcement, which has also negatively affected the pound. On Monday morning, the pound showed signs of recovery, trading at $1.2978, a notable distance from last week’s lows of $1.2844.
Focus on China
Additionally, more fiscal stimulus measures from China are anticipated, with the National People’s Congress convening from Monday through Friday. The implied volatility of the one-week dollar/offshore yuan surged to an all-time high, reflecting concerns over the potential implications of the U.S. election for Sino-U.S. trade relations.
Reports from last week indicated that Beijing is contemplating the approval of over 10 trillion yuan (approximately $1.40 trillion) in additional debt issuance over the coming years to support its fragile economy.
