The U.S. dollar declined on Tuesday, although it remained near its recent highs in an environment marked by uncertainty related to the pace of interest rate cuts as the date for the U.S. presidential election approaches.
The dollar benefited from rising yields
The dollar retreated slightly on Tuesday, although it benefited from a rise in the yield on 10-year U.S. Treasury bonds, which rose to a 12-week high.
On Monday, four Federal Reserve policymakers favored further interest rate cuts, following the Fed’s decision to cut borrowing costs by about 50 basis points in September.
However, the comments from these officials seemed to signal some lingering disagreement over the pace of the cuts.
Three of them stated that a “modest” or “gradual” rate cut may be warranted as a result of the uncertain outlook, although there is still continued resistance from the U.S. economy, while San Francisco Fed President Mary Daly noted that rates remain “very tight,” adding that a strong economy should not preclude further cuts. N
The dollar has also been helped by demand for safe-haven assets, as investors are currently risk-averse with the 2024 presidential election just two weeks away.
“Our perception is that the magnitude of bond and currency movements is being exacerbated by some deleveraging ahead of the U.S. election,” ING analysts said in a note. “The path should be a stronger dollar if FX liquidity conditions in fact worsen through Nov. 5.”
Euro gains ahead of ECB speeches.
In Europe, EUR/USD rose 0.2% to 1.0833 in anticipation of a series of speeches from European Central Bank officials following the latest rate cut.
“It is quite usual for ECB members to adjust the policy message in the aftermath of a rate decision,” ING reported. Naturally, if we see signs of resistance to easing from hawks like Knot and Holzmann today, expect the euro to feel some additional pressure.” Yesterday, hawkish member Kazimir mentioned that the December decision is “wide open”, a rather bearish change from his comments prior to the October meeting.”
GBP/USD rose 0.2% to 1.3003 after data revealed that UK government borrowing increased by £2.1 billion compared to September last year to £16.6 billion, the highest for a September since records began in 1993.
The Bank of England is poised to cut interest rates in the coming months to stimulate the UK economy, although the data highlight the UK’s complex financial situation ahead of next week’s budget.
Yen weakness on political change
The USD/CNY rose 0.1% to 150.91, trading slightly below its highest level since late July.
The yen’s weakness was due to the change in the top of Japan’s government, which raised doubts about whether the Bank of Japan would be able to continue raising rates. The new Prime Minister, Shigeru Ishiba, explicitly stated that Japan’s economy could not withstand further rate hikes.
USD/CNY rose 0.1% to 7.1214, approaching two-month highs, after the PBOC cut its benchmark prime lending rate on Monday.
