MW: Dollar falls vs. euro as election, Fed get under way
Australian dollar hits strongest level since 1983
By Deborah Levine and Lisa Twaronite, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar dropped against the euro and other major counterparts Tuesday, hit after an unexpected rate hike by the Reserve Bank of Australia stood in stark contrast to the likelihood that the U.S. Federal Reserve will ease monetary policy further.
Americans are also heading to the polls, where they are expected to elect new leaders who could impact the dollar over both the short and long term. Analysts also noted some simmering troubles with European sovereign debt that may resurface after the Fed’s plan is disclosed.
The dollar index (DXY 76.79, -0.51, -0.66%) slipped to 76.761 from 77.263 in late North American trading Monday. The index measures the U.S. unit against a basket of six major currencies.
The euro (EURUSD 1.4021, +0.0127, +0.9139%) rose to $1.4033 from $1.3888 late Monday.
Against the Japanese yen, the dollar (USDYEN 80.7100, +0.2300, +0.2858%) rose to ¥80.85, up from ¥80.48. The Bank of Japan holds its policy meeting later this week.
The British pound (GBPUSD 1.6019, -0.0022, -0.1372%) bought $1.6018, compared to $1.6034. The Bank of England also meets this week. See real-time currency quotes and tools.
Commentary on the U.S. elections’ impact on the dollar has been overshadowed by speculation about how much more the Fed will do to support the economy.
“The election has the potential to roil the U.S. dollar over the short, medium and long term,” said Greg Anderson, senior foreign-exchange strategist at Citigroup.
Any lingering doubts in certain contests on Wednesday could make traders shift out of riskier assets like stocks in support of the dollar, he said.
There are also risks until newly elected lawmakers take office in January, with the issue of whether to extend major income-tax cuts remaining unresolved.
“Chances of a hiccup that leads to no extension and therefore an economic disruption to December and January would be greater,” Anderson said.
Over the longer term, though “a landslide Republican victory would presumably lead to greater pressure for the federal government to cut spending,” he said. A convincing deficit-reduction plan could be positive for the greenback.
“However, if markets become convinced that gridlock in Washington will lead to Republicans’ unwillingness to raise taxes and the Obama Administration’s unwillingness to cut spending, then a sweeping Republican victory could become U.S.dollar-negative by the first quarter of next year,” Anderson said.
QE versus sovereign debt
Later in the session, the U.S. policy-setting Federal Open Market Committee will begin its two-day meeting, after which it’s widely predicted to announce a second round of quantitative easing. The market expects the Fed to say it will buy between $400 billion and $600 billion in Treasury bonds over the next several months, according to Citigroup.
