Dollar slips ahead of US election and as Fed rate cut looms

 

Finance - The dollar slipped in Asia on Monday 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 rose 0.4 percent to $1.0884 but faces resistance around $1.0905, while the dollar fell 0.7 percent on the yen to 151.81 yen. The dollar index eased 0.1 percent to 103.79. Treasury futures rallied 10 ticks, recovering some of the losses suffered on Friday. 

 

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 53 cents on a dollar, 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 US equity would likely head lower." 

 

Uncertainty over the outcome is one reason markets assume the Federal Reserve will choose to cut rates by a standard 25 basis points on Thursday, 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 2024 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."