The U.S. dollar declined after an election that was too close to call prompted investors determine that it’s up to Federal Reserve to provide further support to America’s pandemic-stricken economy.
The Bloomberg Dollar Spot Index fell 0.1% as of 9:12 a.m. in New York, erasing an advance of as much as 1%. The yield on 30-year U.S. Treasuries retreated 16 basis points, narrowing the gap with five-year securities by the most since June.
“The polls were wrong, again,” said Kit Juckes, chief foreign-exchange strategist at Societe Generale SA. “Markets wait for clarity, but I still believe the Fed matters more for the dollar than who lives in the White House.”
That’s one reason why currency volatility is extending declines. The prospect of more Fed stimulus means that moves in both currencies and Treasuries could remain subdued. It compounded a drop across contracts earlier in the day after uncertainty over the election results meant that options traders were unclear on the tenors to buy as a hedge against swings.
The greenback typically acts as a go-to haven in times of crisis, and indeed showed just that tendency as results of the U.S. election trickled in. But with the risk of a gridlock in Washington over the election results, and with the fate of further fiscal stimulus in limbo, the onus to act may ultimately fall to the Federal Reserve, which is due to deliver its next policy decision Thursday.
The central bank’s earlier pledge to keep interest rates anchored near zero for years has already weighed on the greenback in recent months and is widely seen as holding turbulence measures close to historic lows. Further action could well exacerbate both trends.
For some, a deadlock on more fiscal stimulus means that wider deficits and reflationary steepening, both of which pressured the dollar, are on hold. That, together with fresh lockdowns Europe, is why George Saravelos, Deutsche Bank’s global head of FX research, says he’s now neutral on the dollar.
“Deflation and risk-aversion, even if originating in the U.S., could be dollar positive,” Saravelos wrote in an emailed note. “All in, we don’t see good risk reward in shorting the dollar anymore, especially against EM currencies. The yen and gold may be one of the few beneficiaries of a highly uncertain environment.”
— With assistance by Susanne Barton
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