Dollar rises along with US rates due to economic outlook

Chuck Mikolajczak

NEW YORK (Reuters) – The dollar rose on Monday, helped by a rise in U.S. bond yields, as strong U.S. economic data suggested the Federal Reserve can afford to be patient in cutting rates as investors prepare for the presidential election November 5th.

The US dollar rose for three straight weeks as a string of positive economic data prompted investors to lower expectations about the size and speed of the Federal Reserve’s rate cuts.

Markets are pricing in a 91.7% chance of a 25 basis point (bps) rate cut at the Fed’s November meeting, and an 8.3% chance of the central bank keeping rates steady at 8.3%, according to CME’s FedWatch Tool . A month ago, the market fully expected a decline of at least 25 bps. with a 50.4% probability of a decline of 50 bps.

“It’s not so much about the Fed as it is about the market correcting and getting closer to the Fed again,” said Mark Chandler, chief market strategist at Bannockburn Global Forex in New York.

“Economic data has been solid and we’ll see that next week when we get GDP data.”

Benchmark 10-year U.S. bond yields rose 8.3 basis points to 4.158% after hitting a 3-month high of 4.172%.

Last week, the Atlanta Fed raised its third-quarter GDP growth estimate to 3.4%.

Dallas Federal Reserve Bank President Lori Logan said Monday she expects more gradual rate cuts for the central bank and suggested she sees no reason why the Fed can’t also continue to shrink its balance sheet.

The dollar index, which measures the greenback against a basket of currencies, rose 0.32% to 103.79, while the euro fell 0.28% to $1.0835. Sterling weakened 0.41% to $1.2995.

The European Central Bank (ECB) last week cut rates for the third time this year. Slovakia’s central bank governor Peter Casimir said Monday that euro zone inflation is likely to return to target next year, but a little more evidence is needed before the European Central Bank can declare victory.

Data on Monday showed German producer prices fell more than expected in September, down 1.4% year on year, mainly due to lower energy costs.

Investors are also positioning themselves as the US election on November 5 approaches. Chandler said a Trump victory would likely lead to tariffs that would affect those countries that are closest and most vulnerable to the U.S. in terms of trading partners, such as Canada, Mexico, China and Japan.

Against the Japanese yen, the dollar strengthened 0.51% to 150.27. On Sunday, October 27, general elections will be held in Japan. While opinion polls vary on how many seats the ruling Liberal Democratic Party (LDP) will win, markets are optimistic that the LDP, along with junior coalition partner Komeito, will emerge victorious.

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Mexican Peso weakened 0.43% against the dollar to 19.992. The Canadian dollar weakened 0.28% against the greenback to 1.38 per dollar, while the Chinese yuan weakened 0.18% to 7.131 per dollar.

In cryptocurrencies, Bitcoin fell 2.47% to $67,048.00.

(Reporting by Chuck Mikolajczak; Editing by William McLean)