By Wayne Cole
(Reuters) -The dollar fell on Monday as investors braced for a possible turnaround for the global economy this week as the United States elects a new leader and another rate cut is likely with a major impact on bond yields.
The euro continued an early climb, rising 0.5% to $1.0891 and looking set to test resistance around $1.0905. The dollar fell 0.6% against the yen to 152.60. Interest rates fell 0.1% to 103.80.
U.S. Treasury yields fell 5 basis points (bps), offsetting some of Friday’s rise. [US/]
Democratic candidate Kamala Harris and Republican Donald Trump remain virtually tied in opinion polls and the winner may not be known until days after voting ends.
Analysts believe that 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 dip in the dollar may have been linked to a poll that showed Harris taking a surprising three-point lead in Iowa, thanks in large part to her popularity with female voters.
“Markets appear to be unwinding some Trump trades, and we suspect there will be abnormal swings in USD crosses over the next day or two due to tighter volatility ahead of a closely contested and highly binary US election” , said ING FX strategist Francesco Pesole.
Gambling site PredictIT showed Harris 53 cents to Trump at 52 cents – what investors are willing to bet for a chance to win $1 – compared to 45 cents to 59 cents a week ago.
“It is widely believed that a Trump victory will be positive for the USD, although many feel this outcome is being discounted,” said Chris Weston, analyst at broker Pepperstone. “A Trump presidency with full control of Congress could have the most impact, as you would expect a solid sell-off in Treasuries, resulting in a higher spike in the USD.”
“A Harris victory and a divided Congress would likely result in ‘Trump trades’ being quickly reversed and priced,” he added. “The USD, gold, bitcoin and US stocks would likely move lower.”
PRICED AT 25BP
Uncertainty about the outcome is one reason why markets expect the Federal Reserve will opt to cut rates by a standard 25 basis points on Thursday, rather than repeating its excessive half-point easing.
Traders have fully priced in a quarter-point cut to 4.50%-4.75%, and an 83% probability of a similar-sized move in December.
“We plan four more consecutive cuts in the first half of 2025 to a final rate of 3.25%-3.5%, but see more uncertainty about both the rate next year and the final destination,” said Goldman Sachs economist Jan Hatzius.
“Both our baseline forecasts and our probability-weighted forecasts are now slightly milder than market prices.”
The Bank of England also meets on Thursday and is expected to cut by 25 basis points, while the Riksbank is expected to ease by 50 basis points and Norges Bank is expected to remain on hold.
The Reserve Bank of Australia will hold its meeting on Tuesday and is expected to keep interest rates stable again.
The BoE’s decision was complicated by a sharp sell-off in government bonds following the Labor government’s budget last week, which also dragged the pound lower.
By early Monday, the pound had recovered some of its losses to reach $1.2978, slightly off last week’s low of $1.2844. [GB/]
More stimulus measures are also expected from China’s National People’s Congress, which meets Monday to Friday.
One-week dollar/offshore yuan implied volatility jumped to a record high, underscoring concerns about Sino-U.S. trade over the U.S. election outcome.
Sources told Reuters last week that Beijing is considering next week approving the issuance of more than 10 trillion yuan ($1.40 trillion) in additional debt over the coming years to revive its fragile economy.
