Uncertainty Lifts U.S. Dollar as Elections and Fed Meeting Loom
As the U.S. elections and the Fed’s November meeting draw near, the uncertainty is strengthening the U.S. dollar. Investors are repositioning their portfolios, and the flight to quality is leading to a reduction in bearish bets against the greenback.
According to data compiled by Bloomberg, dollar shorts declined by nearly $8 billion in the second week of October, marking the biggest increase in dollar sentiment since 2021. At the beginning of the month, short positions betting on a decline in the U.S. dollar exceeded $13 billion.
The shift towards the U.S. dollar is being driven by economic uncertainty surrounding the U.S. election and a reassessment of the monetary policy outlook. Markets are factoring in the possibility of rising fiscal deficits and a pause in the decline of inflation following the election. Combined with data indicating the U.S. economy remains strong, this has led to a reduction in bets on a rapid easing of policy from the Federal Reserve.
According to futures market data, pricing for the extent of Fed rate cuts through September 2025 has fallen by over 10 basis points since the end of last week. Markets are now pricing in a 128 basis point cut compared to the 195 basis point expectation a month ago, indicating a target rate of 3.5-3.75%.
Fed officials speaking earlier this week have also expressed support for a slower pace of rate cuts. Dallas Fed President Lorie Logan called for caution in reducing rates given the ongoing economic uncertainty. Kansas City Fed President Jeffrey Schmid also highlighted uncertainties, supporting a slower pace of cuts. At the same time, Minneapolis Fed President Neel Kashkari stressed that he would need to see real evidence of further labor market weakness before endorsing faster action.
Meanwhile, San Francisco Fed President Mary Daly dismissed the possibility of halting rate cuts, stating that there was no information suggesting rates should stop falling. Daly emphasized the need for rates to continue declining to prevent further weakening of the labor market.
On the other hand, the International Monetary Fund (IMF) lowered its global growth forecast for next year to 3.2%, down 0.1% from its July projection. IMF economists highlighted rising uncertainties and increasing downside risks in the global economy.
The resilient U.S. economy justifies the increased demand for greenback despite the uncertain global economic outlook. In this scenario, U.S. Treasury yields are rising, while emerging markets remain under pressure. Bloomberg strategists noted the possibility of a strong upward trend in U.S. yields, with some market observers predicting that U.S. 10-year benchmark yields could reach 5% next year. This could lead to a stronger U.S. dollar in the coming period.
As pricing continues to move in favor of the U.S. dollar, markets are awaiting further clues from tomorrow’s PMI data and next week’s critical growth, inflation, and labor market reports.
Precious Metals Rally on U.S. Election and Geopolitical Risks
Safe-haven demand, driven by U.S. elections, geopolitical risks, and uncertainty surrounding the global economic outlook, continues to provide tailwinds for precious metals. Gold prices are trading at new all-time highs above $2,750 per ounce, while silver is approaching $35 per ounce, levels last seen in 2012.
As expectations for slower rate cuts from the Fed increase, U.S. Treasuries have faced a wave of selling. The yield on the 2-year Treasury note has risen to 4.05%, while the 10-year benchmark yield has climbed toward 4.22%.
Typically, tighter monetary policy and higher yields are negative for non-yielding gold. However, the current uncertainty and projections that rates will continue to decline—albeit at a slower pace—along with strong central bank and investor demand, are driving positive flows into precious metals.
Economists at Standard Chartered Plc highlighted gold's ability to capture factors that push prices higher, regardless of the macroeconomic backdrop, and expect upward risks to continue in the coming weeks. The bank forecasts that gold will rise to $2,800 per ounce in the fourth quarter of this year and reach $2,900 in the first quarter of 2025.
Oil Prices Volatile as Tensions Rise Despite Ceasefire Attempts
Oil prices have risen again, increasing by around 3% since the start of the week, driven by ongoing tensions in the Middle East despite U.S. efforts to broker a ceasefire.
On Tuesday, U.S. Secretary of State Antony Blinken attempted to arrange a ceasefire with Israeli Prime Minister Benjamin Netanyahu, but conflicts in the Middle East persisted. According to Lebanon's Ministry of Health, Israel attacked a healthcare facility.
Oil prices remain volatile, caught between expectations of a ceasefire that could reduce the geopolitical risk premium and concerns over escalating tensions. While the risk of supply disruptions from the Middle East is pushing prices higher, the demand outlook may limit further upward momentum.