Key points:
The dollar strengthened on Monday, buoyed by rising U.S. bond yields and growing anticipation around the upcoming Presidential election, while Bitcoin surged to a three-month high.
The dollar’s recent climb can be attributed to a range of factors, including robust U.S. economic data and diverging central bank policies.
The greenback was last seen trading 0.17% higher at 103.65, having added 0.55% over the week.
This strength comes despite a 0.3% pullback on Friday when Chinese economic stimulus boosted risk sentiment across markets.
Picture: USDX climbs to 103.395, with bullish momentum as seen on the VT Markets app.
The USDX chart shows a close at 103.395, reflecting a minor upward movement with a 0.14% gain for the session. Price action moved between a low of 103.220 and a high of 103.460, indicating a period of consolidation before a late-session rally.
The US Dollar Index has been strengthening amid expectations that the Federal Reserve will maintain a cautious approach to interest rate cuts, possibly keeping rates higher for longer.
Ongoing conflict in the Middle East has also driven demand for the dollar as a safe-haven asset.
Market participants are also closely watching the impact of US Treasury yields and upcoming economic data releases, including inflation and retail sales figures, which could influence the dollar’s trajectory.
Meanwhile, both the euro and British pound weakened against the dollar, with the euro down 0.16% at $1.0849, and sterling slipping 0.2% to $1.3022.
The broader picture points to solid U.S. economic indicators—such as job growth and retail sales—helping sustain the dollar’s gains.
The U.S. GDP outlook remains favourable, whereas Europe has shown a more subdued performance. The European Central Bank (ECB) signalled a dovish stance last week, heightening the gap between U.S. and European bond yields.
This divergence has driven traders to favour the dollar over the euro, with the latter now down more than 3% in the past three weeks and trading near a two-and-a-half-month low.
The euro has also broken below its 200-day moving average, a bearish signal that traders are watching closely.
U.S. 10-year bond yields are widening their lead over their German counterparts, with the spread reaching around 189 basis points—the highest since July.
This growing gap reflects differing monetary policy paths between the Federal Reserve and the ECB, with the latter’s governors considering loosening their tight policy stance due to falling inflation forecasts.
Sterling has also faced pressure this month, with the spread between U.S. and UK bond yields turning negative by 3 points.
Weaker-than-expected inflation in Britain has led to expectations of a more bond-friendly budget announcement by Finance Minister Rachel Reeves later this month, weighing on the pound.
As the U.S. Presidential election approaches, market participants are closely following polling trends, which have shown improving odds for Trump.
His policy platform, viewed as likely to support higher U.S. interest rates and hurt trading partners, has given the dollar an additional boost.
Bitcoin has also surged, reaching $68,555, as traders speculate that a Trump administration would adopt a softer approach to cryptocurrency regulation. Since October 10, Bitcoin’s value has increased by 18%, briefly touching $69,487.
In Japan, the yen has held its ground just below 150 per dollar, a key psychological level that was breached briefly last week.
The yen’s resilience comes amid an upcoming general election on October 27, where markets expect the ruling Liberal Democratic Party and its junior coalition partner to maintain power.
Although Japan’s economic outlook remains relatively stable, traders are watching for any surprises from the election that might affect the yen’s trajectory.
Looking ahead, the market focus will shift towards corporate earnings reports and the continuing U.S. election cycle, both of which could add volatility to currency markets.
The Mexican peso, which dropped 3% last week, remains under pressure as Trump’s election prospects stir concerns over potential renewed tariffs that would weigh on Mexico’s trade outlook.
The peso, along with other emerging market currencies, could see further downside if U.S. rates remain elevated post-election.
With the ECB potentially loosening its stance and U.S. yields continuing to rise, the divergence between U.S. and European bond yields could deepen, putting additional pressure on the euro and bolstering the dollar.
See also: Week Ahead: Central Bank and CPI Shakeup Coming
Traders will need to weigh whether these trends present the right moment to place election trades with more conviction, particularly in light of the volatility that could accompany the final stretch of the campaign.
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