(Bloomberg) -- The dollar is on pace for its best month since 2022 as traders reprice Federal Reserve expectations and prepare for a presidential election that threatens to upend macro markets.
The greenback rose against all of its Group-of-10 peers Wednesday, matching a steady climb in Treasury yields. Investors heavily sold the yen, which fell below the 153 per dollar mark to its weakest level in 12 weeks before paring losses, while the euro and pound both slipped for a third-straight session. A Bloomberg gauge of the dollar is up some 3.1% in October.
With the election now less than two weeks away, the currency’s rise reflects, in part, a bid for the relative safety of US assets amid fear of market turmoil — as well as the prospect that the greenback could gain even more under a Donald Trump presidency. The cost to hedge against future swings in the dollar is increasingly on the rise and at the highest in 19 months.
“If you don’t hedge your book for the rise in Trump’s probability, you’d look rather foolish if you didn’t buy that tail risk when it comes to end of year discussions,” said Jordan Rochester, a macro strategist at Mizuho. The market, he added, is seeing “continued US dollar buying to the point where it’s extremely uneconomic.”
As the US economy proves resilient, meanwhile, speculative currency traders have largely erased a bearish dollar outlook held since the market tumult of August. One-month risk-reversals for the US currency — a measure of trader sentiment — are hovering near their most bullish since July.
That matches a pullback in Fed interest-rate cut wagers in the swaps market. Swaps traders are now pricing about 40 basis points of easing from the Fed over its next two meetings, compared to more than 65 at the beginning of October.
“US growth is above potential and surprising to the upside, as a result Fed dovish expectations have now come off and we are now questioning whether we get sequential cuts,” said Skylar Montgomery Koning, a foreign-exchange strategist at Barclays Plc. “At the same time there have been dovish drivers for the euro, pound and yen.”
--With assistance from Vassilis Karamanis.
(Updates to reflect market close.)
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