Strong Dollar Despite US Interest Rate Cuts... Will It Persist Until the Presidential Election?

Dollar Index Hits Highest Level Since August 1

Contrary to expectations of a weaker dollar following the US interest rate cut last month, the dollar's value reached its highest level since August. Global major players are reducing their dollar short positions about two weeks ahead of the US election.

The Dollar Index, which measures the dollar's value against six major currencies including the euro and yen, stood at 103.97 on the 21st (local time), marking the highest level since August 1 (104.42). Accordingly, on the 22nd in the Seoul foreign exchange market, the won-to-dollar exchange rate rose by 6.9 won from the previous day's closing price to trade at 1,382.1 won at 9:10 a.m. It was the first time since July 31 that the won crossed the 1,380 mark during intraday trading. The dollar-to-yen rate, which surpassed 150 yen for the first time in about two and a half months on the 17th, was trading around 150.70 yen at the same time.

According to Bloomberg's data, hedge funds and asset management firms reduced their dollar short positions by approximately $8 billion in the second week of this month compared to the previous week. Bloomberg explained, "This change in net positions is the largest since 2021," adding that "traders are reducing their bets on a weaker dollar ahead of the US election."

Statements from Federal Open Market Committee (FOMC) members indicating that the US central bank, the Federal Reserve (Fed), will lower interest rates gradually and slowly are factors fueling the continued strong dollar. Economic indicators continue to show strength in the labor and consumer markets following the Fed's big cut (a 0.5 percentage point rate cut) last month.

Neel Kashkari, President of the Minneapolis Federal Reserve Bank, said at an event in Wisconsin that "there will likely be more gradual rate cuts over the next few quarters to reach a neutral (interest rate) level," indicating expectations for smaller rate cuts ahead. Loretta Mester, President of the Dallas Fed, also emphasized at an event in New York that the Fed should lower rates cautiously. According to the Chicago Mercantile Exchange (CME) FedWatch Tool, the probability of the federal funds rate remaining unchanged in November rose by 1.3 percentage points from the previous day to 10.9% in the futures market on that day.

About two weeks ahead of the US presidential election, the increasing likelihood of Republican candidate former President Donald Trump's victory is also a factor behind the strong dollar. Morgan Stanley stated that while Trump would prefer a weaker dollar to promote exports, if elected, his tariff increase policies could cause a strong dollar.

Mark McCormick, Global Head of Foreign Exchange and Emerging Markets Strategy at TD Securities, emphasized, "The market cannot ignore US election risks. For the time being, one must stick with the US dollar."

Meanwhile, US Treasury yields rose sharply on the day. The benchmark US 10-year Treasury yield, a global bond yield benchmark, increased by 11 basis points (1 bp = 0.01 percentage points) from the previous trading day to 4.19%, marking the highest level since July 26.