The dollar rose on Monday ahead of the US presidential election as lingering concerns about financial markets and the world economy prompted investors to reduce risk and seek safety in dollar-denominated assets. Expected interest rate cuts later this week by the European Central Bank and Bank of England hurt the euro and sterling, while data showing US factory activity plunged to a 26-year low last month boosted US and global recession fears.
The dollar tends to gain as risk aversion rises because dollar-based investors repatriate money or look for safety in US Treasury debt. "Risk aversion is returning a bit and it's tied to underlying concerns regarding the financial sector as well as the global outlook," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.
He said the US manufacturing data, an $11 billion capital injection in South Korea, an interest rate cut in India and expected rate cuts in the euro zone, Britain and Australia show ongoing stress in financial markets and the world economy even as interbank lending markets continue to loosen up.
Late afternoon, the euro was down 0.7 percent at $1.2640 but off a session low of $1.2598. Sterling fell 1.4 percent to $1.5835 after earlier dipping to $1.5784. Still, the credit market thaw meant risk appetite remained more robust than it was during the height of the credit crisis last month. The dollar rose 0.6 percent to 99.04 yen, which analysts tied partly to the Bank of Japan's move to cut interest rates by 0.2 percentage points last week.
The high-yielding Australian dollar rose 1.9 percent to $0.6801 despite expectations of a half percentage point rate cut when the central bank meets on Tuesday. On the monetary policy front, the ECB, BoE and the Reserve Bank of Australia are expected to cut rates by at least half a percentage point. The US Federal Reserve last week cut its key rate by half a point to 1 percent and the Bank of Japan (BoJ) cut its rate to 0.30 percent from 0.50 percent. Analysts say the BoE is the most likely of the three to surprise markets with an even heftier rate cut.
Investors were also focused on the US presidential election on Tuesday. Analysts say a win by Democrat Barack Obama, who is leading his Republican opponent, John McCain, in most polls, would be marginally better for the dollar, if only because the Democrats already control Congress. That would make it easier for a new administration to push through activist policies to boost markets.
Longer-term, it may be the popularity of the next president that determines who strongly the dollar performs, said Alan Ruskin, chief international strategist at RBS Greenwich Capital Markets in Greenwich, Connecticut.
"The dollar is being influenced by many factors of late, but the prospect of a more popular president and the potential for some feel good factor cannot be discounted as also supporting the dollar recovery," Ruskin said. "As the president goes, so goes the dollar, and as the dollar goes, so goes the US president.