'Trump trade' and yields keep dollar supported

By Vidya Ranganathan

SINGAPORE (Reuters) - Cryptocurrency bitcoin hit a three-month high in early trading on Monday and the dollar looked set to extend its gains in markets counting down to the U.S. presidential election in two weeks.

Election polls that show rising odds of former President Donald Trump winning the Nov. 5 election are boosting the dollar, since his proposed tariff and tax policies are seen as likely to keep U.S. interest rates high and undermine currencies of trading partners.

Currency moves in major markets last week were driven by the European Central Bank's dovish rate cut and strong U.S. data that pushed out expectations for how fast U.S. rates can fall, particularly if Trump wins the presidency.

The yen was down nearly 0.2% at 149.26 per dollar but staying on the stronger side of 150 per dollar after having breached that level briefly last week for the first time since early August.

The dollar index , which measures the greenback against major rivals, was at 103.49. It fell 0.3% on Friday as risk appetite picked up broadly across markets after China announced more details of its broad stimulus package, but logged 0.55% gains for the week. The euro stood flat at $1.0862 and sterling was also flat around $1.3041.

Bitcoin got a lift from Trump's improving prospects since his administration is seen as taking a softer line on cryptocurrency regulation. It was last up 0.2% at $68,869, off a peak of $69,487 that took its gains since Oct. 10 to 18%.

With no major economic events due this week, market focus will be on corporate earnings and U.S. election risk, and possibly a rise in costs to hedge dollar and other portfolio risks, Chris Weston, head of research at Australian online broker Pepperstone, said in a note.

"With just 15 days to go until the U.S. election, traders need to decide if now is the right time to start placing election trades with greater conviction," Weston said.

The clearest way to express the Trump tariff risk was to be long dollars versus the euro, Swiss franc and Mexican peso, he said.

Brad Bechtel, global head of FX at Jefferies, also noted that rising real interest rates were helping the dollar along, particularly against those three currencies.

"We expect this trend to continue straight into the election and if Trump wins, likely well after the election as well," Bechtel wrote.

Last week, the yen fell 0.3%, the euro 0.6% and sterling was flat. The Mexican peso fell 3%.

The euro is down more than 3% in three weeks and has fallen through its 200-day moving average, and is parked near a 2-1/2 month low.

Analysts say rising U.S. real rates are driving the dollar up. But more so is the fact that interest rates elsewhere are falling fast, giving the dollar a yield advantage.

The closely-watched gap between U.S. and German 10-year bond yields has widened to around 189 basis points (bps) as U.S. yields have climbed in recent weeks while German ones have declined.



Yields in Britain too have moved against the pound this month on weaker inflation readings and expectations Finance Minister Rachel Reeves will announce a bond-friendly budget on Oct. 30. The spread between U.S. and gilt yields has gone from being 24 points in sterling's favour to 3 points negative.

Japan will hold a general election on Sunday, Oct. 27. While opinion polls vary on how many seats the ruling Liberal Democratic Party (LDP) will win, markets have been sanguine that the LDP along with junior coalition partner Komeito will prevail.

Source: Investing.com