The dollar traded without a clear direction on Monday, weakening against the euro while gaining against the yen. Three catalysts could set its course this week: Tuesday's US midterm elections, Friday's employment report and the AI-related equity correction.
The Dollar Index slipped toward 101.66 during Monday's European session, with the greenback weakening against the euro, sterling and the Swiss franc. It gained against the yen, the Australian dollar and the New Zealand dollar. According to ActionForex, the mixed performance offered little evidence of a dominant market-wide driver.
Yet Fed expectations moved higher. CME FedWatch showed the probability of a December 25bps hike rising from 70.7% to 76.6% between Friday's settlement and Monday. The US 2-year Treasury yield was little changed around 4.59%, and the 10-year eased toward 4.92%.
Midterms: the Senate may matter more than the House
A Democratic takeover of the House has become the prevailing market expectation, according to ActionForex. Wolfe Research's October survey found that 96% of 138 institutional investors expected Democrats to gain control of the chamber.
The Senate looks less settled. In the same survey, 58% of investors anticipated a Democratic Senate, while the firm's own probability assessment was close to 49%. Because senators confirm Federal Reserve appointments, TD Securities has identified a possible constraint on nominations perceived as threatening the central bank's independence.
For the dollar, ActionForex sees no reliable basis for assigning a predetermined bullish or bearish reaction. Wednesday's Treasury refunding announcement, including planned auction sizes, will provide another focal point.
Payrolls test the case for a December rate hike
Economists expect October nonfarm payrolls to increase by 56K, following September's 29K gain. The unemployment rate is expected to hold at 4.2%, and average hourly earnings growth is projected to accelerate from 0.1% to 0.3% mom.
The report arrives against a backdrop of persistent inflation. September headline PCE inflation accelerated from 3.4% to 3.6% yoy, and the Fed held rates at 3.75–4.00%, with two policymakers dissenting in favour of an immediate rate hike.
AI equities hit yields more than the dollar
Friday's sharp decline in Nasdaq, accompanied by substantial semiconductor losses, reinforced concerns about AI investment spending. S&P Global Ratings also revised Meta's credit outlook from stable to negative, without downgrading its rating.
Treasury prices rose during the equity decline, while the Dollar Index gained only marginally. ActionForex says the selloff has shown up in Treasury yields rather than in broad dollar appreciation.
Source: ActionForex
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