Market comment
Market analysis on behalf of Dilin Wu Research Strategist at Pepperstone
24th October 2024
The DXY is ramping up, continuously breaking through one resistance level after another. This rally underscores a growing confidence in “US exceptionalism,” which could gain further traction if Trump wins, potentially pushing the index towards 106.5 by year-end.
The dollar’s rise has been fueled by hard selling in U.S. Treasuries, particularly at the long end, with the 10-year yield climbing from 3.6% in mid-September to over 4.2% now. This uptick in the yield curve signals market optimism about “US exceptionalism,” especially when compared to the ECB’s back-to-back rate cuts, BoE’s dovish twist, and the aggressive easing from the BoC. Moreover, growing election uncertainties, heightened fiscal deficit concerns, and lower expectations for Fed cuts have made rising Treasury yields the least resistance path. This interest rate support naturally benefits USD bulls.
Despite a slight pullback today, the market is poised to take advantage of any dollar weakness, fueled by the belief that Trump’s election would further strengthen its uptrend. With Trump and Harris polling in six or seven battleground states within the margin of error, the ‘Trump trade’ hasn’t been fully reflected in the DXY.
The U.S. election could yield three outcomes: if Harris wins with a split Congress, the other two scenarios favor dollar appreciation. If Trump wins with a split Congress, his tariff and deregulation policies could support the dollar. If a ‘red wave’ occurs, he may implement more significant fiscal expansion by greater bond issuances. This could raise market concerns about re-inflation and even the possibility of interest rate hikes. Furthermore, to ensure stability in the U.S. Treasury market, he may adopt stricter tariff policies, which would further bolster the dollar’s strength.
Overall, if the Eurozone economy remains weak, the October non-farm payroll report exceeds expectations, and distorted data does not impact the Fed’s interest rate decision, Trump’s potential election could push the dollar index to retest 106.5.
