As the Dollar Strengthens, Gold Hits Record High Amidst Election Uncertainty
Gold prices rose to a new record high on Wednesday, while the dollar also strengthened. Investors are seeking direction amid the uncertainty of the upcoming U.S. elections and the Federal Reserve's interest rate policies. Asian stocks showed little movement, reflecting a cautious stance among traders reluctant to make significant decisions before the outcome of the U.S. presidential race becomes clear.
The expected cautious approach of the Federal Reserve regarding interest rate cuts has diminished risk appetite. This has led to an increase in U.S. Treasury yields, causing the dollar to reach multi-month highs against major currencies like the euro, pound, and yen. Notably, the yen significantly weakened to reach the 150 level against the dollar, prompting verbal interventions from Japanese officials.
While MSCI's broadest index of Asia-Pacific shares outside Japan showed a marginal increase, Tokyo's Nikkei index experienced a slight decline in early trading. According to Anderson Alves, a trader at ActivTrades, as investors prepare for significant events like the U.S. elections and a busy corporate earnings calendar, market volatility is becoming more common within a narrow range.
Chinese and Hong Kong equities started the day steadily, bolstered by government promises of economic support, helping major indexes to open higher.
Investors have focused on the momentum shifting towards Donald Trump's potential victory, with policies such as tariffs and immigration restrictions expected to increase inflation. This supports a strong dollar amid expectations that U.S. interest rates may remain high for longer. Betting sites indicate increasing odds for Trump against Democratic Vice President Kamala Harris, though polls suggest a close race.
With less than two weeks until the November 5 election, market volatility is expected to rise as investors prepare for various outcomes.
U.S. 10-year Treasury yields reached 4.216% during Asian trading hours, having climbed to a three-month high of 4.222% the previous day. Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, noted that Treasury sell-offs deepened this week, suggesting that a Fed pivot towards a strong economy could re-ignite inflation. Trump's rising election prospects are also impacting expectations of continuous Fed easing.
Markets have priced in a 41-basis point cut for the current year, with another 100 basis points expected next year. Traders anticipate a 25-basis point cut to borrowing costs next month following the 50-basis point slash initiated by the Fed in September.
The dollar index, comparing the U.S. currency against six rivals, reached 104.17, its highest since August. The yen fell to a three-month low of 151.74 per dollar, and the euro dropped to its lowest since August at $1.0792.
In the commodity market, gold stabilized around $2,743.42 after reaching a peak of $2,749.07, driven by Middle East tensions and uncertainty surrounding Fed policy and the U.S. elections, boosting demand for safe-haven assets.
Oil prices saw a slight decline, with Brent crude futures dropping 0.4% to $75.73 per barrel, and West Texas Intermediate crude falling 0.38% to $71.47 per barrel after sharp gains earlier in the week.