The dollar declines after the US elections as risk appetite improves

The dollar continued to decline against major currencies on Thursday, following the widespread victory of the Democrats in the US midterm elections, in a development that strengthened investors’ appetite for risk and pushed oil prices to a sharp decline.

On the other hand, the Japanese yen rose after the minutes of the Bank of Japan’s September meeting strengthened expectations of continuing to raise interest rates, while the British pound rose, approaching its highest levels in 7 weeks, ahead of the announcement of the Bank of England’s decision on monetary policy.

Democrats achieved a majority in the Senate and House of Representatives, which boosted the gains of US Treasury bonds and global stocks, despite continuing questions about the extent of the new Congress’s willingness to support the artificial intelligence sector.

Rodrigo Catril, chief currency strategist at National Australia Bank, said that the market reaction, especially the sharp drop in oil prices, reflects expectations that US President Donald Trump will no longer be able to move forward with a more stringent agenda, including the US-Israeli war on Iran and trade tariffs.

He added that currency and market movements may not necessarily reflect a medium-term trend, but may be related to investors' positions or even an exaggeration in reaction to the election results, noting that the decline in oil prices and returns constitutes a factor supporting risk appetite.

The dollar index, which measures the performance of the US currency against a basket of major currencies, fell by 0.25 percent to 101.22 points, continuing its decline by 0.34 percent during Wednesday’s session.

On the other hand, the euro rose by 0.32 percent to 1.1263 dollars, and the Japanese yen rose by 0.35 percent to 157.84 yen to the dollar.

Interest and economic data

Despite the political shift in the United States, expectations of the path of interest rates at the Federal Reserve have not witnessed a fundamental change, as markets price an 80.7 percent probability of raising interest by at least 25 basis points during the December meeting, according to the CME Group’s “Feed Watch” tool, compared to 77.4 percent in the previous session.

Markets are awaiting the weekly unemployment claims data on Thursday, and the non-farm payrolls report on Friday, as they are among the main indicators that monetary policy makers rely on in assessing labor market conditions.

This data comes after the ADB report issued on Wednesday, which showed that US private sector jobs rose more than expected in October.

Brian Martin, head of the G3 economics department at ANZ Bank, said that the limited growth in labor supply in the US market means that the unemployment rate will remain low, which supports continued consumption growth, adding that the midterm elections are unlikely to change the course of the expected monetary tightening.

In the currency market, the pound sterling rose by 0.14 percent to $1.349, heading towards recording its highest close since September 14, ahead of the announcement of the Bank of England’s decision on Thursday.

Markets expect the bank to raise interest rates to confront inflationary pressures resulting from the sharp rise in energy costs, but at the same time it may seek to limit investors' bets on a series of additional increases over the next year.

In Japan, the minutes of the Bank of Japan's September meeting strengthened expectations for continued tightening of monetary policy, after policymakers raised interest rates to 1.25 percent, the highest level in 31 years. Some Council members indicated the possibility of accelerating the pace of increases, with markets widely anticipating the next step in December.

The Australian dollar rose 0.11 percent to $0.7011, while the New Zealand dollar jumped 0.5 percent to $0.5648.

In the cryptocurrency market, “Bitcoin” rose by 0.28 percent to $80,400.79, and “Ethereum” rose by 0.18 percent to $2,421.52.

Gold prices rose by about 2 percent, on Thursday, to record their highest levels in two weeks, supported by a decline in the dollar and US Treasury bond yields, in the wake of the significant gains achieved by the Democrats in the midterm elections for the US Congress.

Gold rose in instant transactions 1.9 percent to $4,134.83 per ounce, by 03:16 GMT, recording its highest level since October 22. The precious metal jumped by about 3.4 percent on Wednesday, achieving its largest daily gain since August 19.

US gold futures for December delivery also rose 1.8 percent to $4,144.20 per ounce.

Lynn Tran, a market analyst at XS.com, said that the weakness of the dollar and the decline in US Treasury bond yields contributed to gold’s recovery and its exceeding the level of $4,000 per ounce, noting that maintaining trading above this level remains an essential factor for the continuation of the recovery.

She added that continued support for investment flows and revenue movements may help gold stabilize above $4,000, and open the way for it to recover towards $4,200, then $4,400 per ounce.

The dollar fell slightly on Thursday, following the broad victory of the Democrats in the US midterm elections, which removed a major source of uncertainty and promoted a rise in global stock markets.

The decline in the dollar makes gold denominated in the US currency less expensive for holders of other currencies, which enhances demand for it.

In the bond market, the yield on 10-year US Treasury bonds fell by 6 basis points overnight, and by an additional basis point in early trading in Tokyo, to reach 4.87 percent.

Function and benefit statements

Markets are awaiting the US non-farm payrolls report, scheduled for release on Friday, for additional indications on the path of the Federal Reserve's monetary policy.

The CME Group's Fed Watch tool shows that traders are currently pricing in an 82 percent probability of a US interest rate hike next December.

High interest rates usually increase the opportunity cost of holding gold, which does not generate a return, reducing its investment attractiveness.

In price forecasts, Citi Bank set a target for gold at $4,500 per ounce within a period ranging between zero and three months, according to what was reported on Wednesday, indicating that there are great opportunities for further rise if the Strait of Hormuz is reopened and the intensity of the conflict between Yemen and Saudi Arabia decreases before the end of the year, which is the scenario that the bank expects.

As for other precious metals, silver rose in spot transactions 1.7 percent to $53.12 per ounce, platinum rose 2.1 percent to $1,527.65, while palladium increased 2.6 percent to $1,030.14 per ounce.

Oil prices fell for the fourth day in a row, on Thursday, amid expectations that the losses incurred by the Republican Party, to which US President Donald Trump belongs, in this week’s congressional elections will limit the possibilities of escalation of the US-Israeli war on Iran.

Brent crude futures fell 80 cents, or 0.85 percent, to $93.82 per barrel, by 04:26 GMT, while US West Texas Intermediate crude futures fell $1.20, or 1.36 percent, to $86.92.

The two benchmarks fell by more than 8 percent during the previous session, recording their lowest levels since August 31.

Two sources familiar with Gulf government circles said on Wednesday that Trump, whose position has become weaker in the face of a Congress that may be controlled by Democrats and be able to restrict his military options, now has a greater incentive to reach an agreement, adding that launching a large-scale attack on Iran has become less likely.

A settlement to the dispute would allow the restoration of oil flows from regions of the Middle East affected by the war, although analysts warn that the path of developments remains unclear.

“Markets are evaluating the impact of the midterm elections on the next steps that Donald Trump may take regarding the war with Iran, and are pricing in greater possibilities for the war to end,” said June Gu, senior oil analyst at Sparta Commodities.

She added that the markets will witness more volatility, in light of the continued uncertainty about the path towards reaching a diplomatic settlement that ends the war, in addition to the sharp decline in global strategic reserves.

In a development on the supply front, oil shipments through the Strait of Hormuz, the main waterway for most Gulf oil supplies, have returned to levels approaching those recorded before the war, according to analysts, albeit at higher costs.

The JPMorgan group said in a note on Wednesday that the resumption of supply flows from the Gulf returned the global oil market to record surplus, after months of turmoil resulting from the war.

The group estimated that the market returned to a surplus of 1.1 million barrels per day in September, which expanded to 1.4 million barrels per day in October, approaching the average surplus recorded last year of 1.3 million barrels per day.

Blurring of the political path

However, uncertainty remains before the Democratic-majority Congress takes office next January.

The Citi Group said in a note on Thursday that there are fears that the White House, after the end of the midterm elections, will focus on using its executive powers in foreign policy, which may open the way for a new escalation in the confrontation with Iran.

For its part, the Eurasia Group reduced its estimates of the possibility of resuming US strikes on Iran to 60 percent, from 65 percent, but it also reduced the probability of reaching an agreement to 10 percent, from 20 percent, in light of Iran’s adherence to its demands, and ruling out Trump’s acceptance of conditions that might be interpreted as a defeat.

On the other hand, the group raised its estimate of the possibility of the confrontation continuing without a resolution to 30 percent, compared to 15 percent previously.

Eurasia said that any escalation, despite the recent decline in oil prices, could push Brent crude oil to rise more sharply, to range between $110 and $125 per barrel.

In turn, Mukesh Sahdev, CEO of X Analysts, a consulting firm in the energy sector, said that commercial oil reserves in major consuming economies are approaching their lowest levels in 15 years, warning that the results of the US elections may further harden the Iranian position.

In the United States, inventories of crude oil, gasoline, and distillates declined over the past week, coinciding with a rise in demand to its highest levels in a year, according to US Energy Information Administration data issued on Wednesday.