US dollar rally fades before midterm elections

London

THE US dollar paused after three consecutive weeks of gains as investors took profits before US midterm elections this week that may fuel a bout of volatility for global markets, with the British pound leading gains on Brexit deal breakthrough hopes.

Notwithstanding a dollar sell-off in the second half of last week, hedge funds added to their dollar holdings taking net long positions to its biggest levels since Dec 2016 as latest data have encouraged more bullish bets.

But market analysts warn that an unexpected outcome at the midterm elections could trigger a massive unwind of long dollar positions and undermine the greenback which has rallied more than 7 per cent from April lows against its rivals.

Tuesday's US congressional election is widely expected to help the Democratic Party, who have a strong chance of winning control of the US House of Representatives, with Republicans likely to keep the Senate.

"On the contrary, if the Republicans put up a strong showing, that could give President (Donald) Trump a freer hand and he could step up his criticism of the Fed which may hurt the dollar," said Ricardo Evangelista, a senior analyst at ActivTrades plc in London.

The dollar index was down 0.1 per cent at 96.39. It hit a June 2017 high of 97.20 last week.

Speculators added to their net long US dollar bets, taking the value of the net long dollar position to US$26.74 billion in the week ended Oct 30, nearing its highest level since Dec 2016, according to latest futures data.

Friday's data showed that US jobs growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pushing US Treasury yields on 10-year maturities to 3.2 per cent on Monday.

Broader moves in the currency markets were muted with only the British pound the big gainer as expectations grew that Britain and the European Union (EU) are inching closer to a deal.

The currency was lifted by a report over the weekend that said an all-UK customs deal will be written into the legally binding agreement governing Britain's withdrawal from the EU.

The strong US data also brought into prominence the diverging trends between a robust US economy and its struggling European counterpart with a Citibank economic monitor showing the European index near 2018 lows.

The single currency softened 0.1 per cent to US$1.1378. REUTERS