(Bloomberg) -- The US dollar posted its biggest monthly gain in more than two years as a resilient economy prompts traders to dial back expectations for how quickly the Federal Reserve will lower interest rates.
The Bloomberg Dollar Spot Index advanced nearly 3% in October, the most since September 2022. The move was driven by a sharp jump in Treasury yields, which gave investors incentive to shift cash into the US. Positioning ahead of next week’s presidential election also played a role, since the dollar is frequently used as a temporary haven from financial-market volatility.
“What we’ve seen is the markets gravitating quite aggressively in a short-term period toward buying the dollar,” Mark McCormick, global head of FX and EM strategy at TD Securities, told Bloomberg Television Thursday. “US data, in a world of data dependence, is better than most other places around the world.”
Figures released this week showed the economic expansion is continuing at a solid pace, bolstering the case for a slower pace of monetary easing from Fed policymakers following last month’s outsized rate-reduction. On Thursday, separate data reinforced that case, with the Fed’s preferred measure of underlying US inflation posting its biggest monthly gain since April.
Traders are now focused on the October jobs report, set to be released Friday at 8:30 a.m. New York time. Economists expect the labor figures to show weaker hiring in October, in part from the temporary impact of hurricanes in the South and major strikes, including at Boeing.
US government bonds, meanwhile, are set for their biggest biggest monthly loss in two years amid the shifting Fed expectations.
“The dollar strength this month was due to a number of factors, but one of the main ones was the increase in US rates relative to other developed market rates,” said Leah Traub, a portfolio manager and head of the currency team at Lord Abbett. Still, Traub said traders may seek to profit on bullish dollar positions by closing them out ahead of Tuesday’s election and the Fed’s policy meeting two days later.
But options markets are pricing in an even stronger greenback for November. The one-month risk reversal for the Bloomberg dollar index traded at 0.38% in favor of calls on Friday, indicating that traders are bullish the US currency.
--With assistance from Manus Cranny, Dani Burger and Matthew Boesler.
(Updates to reflect market close.)
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