Dollar Poised for Fed-Led Rally as Election Fog Clears

  • Greenback index reaches two-month high amid economic optimism
  • Bets for higher rates rise even as jobs data trail estimates

Neither a below-forecast jobs report nor the complexities of the U.S. presidential election will be enough to halt the dollar from extending gains beyond a two-month high, according to Deutsche Bank AG, the world’s fourth-biggest currency trader.

The greenback closed near the strongest level since July Friday as the Federal Reserve remains on track to raise interest rates by the end of the year even after data showed the U.S. economy added 156,000 jobs in September, less than the median forecast of 172,000 in a Bloomberg survey of economists. Hedge funds’ net positions that profit from a stronger greenback reached the highest level since February.

"The dollar will get reasonable support into that period of time between the elections and the Fed tightening," said Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank. "It will be hard to shift the market expectations in terms of a Fed rate hike in December."

The U.S. currency will strengthen to $1.05 against the euro by the end of the year from $1.1201 on Friday, according to Deutsche Bank’s forecasts.

The dollar has been on the rise since the middle of August as signals of faster economic growth and accelerating inflation fueled bets for U.S. monetary tightening at a time when most other major central banks remain stimulative. While the presidential election is a risk factor for the greenback, some investors including the world’s top currency forecaster Julius Baer Group Ltd. see dollar strength irrespective of who prevails in the November vote.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, gained 1 percent this week and reached the strongest level since July 27. The greenback gained 1.6 percent to 102.98 yen.

Market Positions

Hedge funds raised net-bullish futures positions on the dollar versus eight major currencies in the week through Oct. 4, according to the Commodity Futures Trading Commission. Bets that the currency will rise outnumbered bearish wagers by 197,733 contracts, compared with 190,081 the previous week.

Options traders are also showing an increasing bias for the greenback. There’s a premium for contracts granting rights to buy dollars over most major currencies, except the yen and Swiss franc, according to three-month risk-reversal rates tracked by Bloomberg.

Payroll gains in the U.S. economy slowed for a third month, while August hiring was stronger than initially estimated, Labor Department data showed Friday. The share of working-age people in the labor force climbed to a six-month high in September and wage growth picked up, while the unemployment rate rose to 5 percent.

The jobs number “was encouraging and suggests the momentum is continuing,” Kansas City Fed President Esther George, who dissented at the Fed’s Sept. 20-21 meeting in favor of a quarter-point rate increase, said on Friday. Futures indicate a 65 percent chance the central bank will tighten policy by its December meeting, with the calculation based on the assumption the effective fed funds rate will trade at the middle of the new range after the central bank’s next increase.

“There’s no reason to think the recent bid tone is not going to continue,” said Jack Spitz, managing director for foreign exchange at National Bank of Canada in Toronto.

— With assistance by Andrea Wong

(Corrects spelling of Julius Baer in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE