Forex Today: US Dollar eases as sentiment strengthens ahead of midterm elections

2 November, Monday: Key developments to watch

At the start of the week, the US Dollar (USD) is finding it difficult to hold its ground against major peers as risk appetite improves. October's Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) is due in the second half of the day on the US economic calendar. Central bankers' remarks will also draw close scrutiny. The more significant event is Tuesday's US midterm elections.

US Dollar: Today's Percentage Moves

Today's percentage moves in the US Dollar (USD) against the major currencies listed appear in the table below. Its weakest performance was against the Euro.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.27%	-0.11%	0.17%	0.07%	0.20%	0.27%	-0.27%
EUR	0.27%		0.18%	0.41%	0.33%	0.47%	0.53%	0.03%
GBP	0.11%	-0.18%		0.25%	0.16%	0.30%	0.36%	-0.14%
JPY	-0.17%	-0.41%	-0.25%		-0.07%	0.06%	0.11%	-0.41%
CAD	-0.07%	-0.33%	-0.16%	0.07%		0.15%	0.19%	-0.31%
AUD	-0.20%	-0.47%	-0.30%	-0.06%	-0.15%		0.06%	-0.45%
NZD	-0.27%	-0.53%	-0.36%	-0.11%	-0.19%	-0.06%		-0.50%
CHF	0.27%	-0.03%	0.14%	0.41%	0.31%	0.45%	0.50%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following that row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Below 102.00, the USD Index is trading lower early Monday. It finished the previous week slightly higher as a sharp technology-stock sell-off drove safe-haven demand across markets. US stock index futures are up between 0.4% and 0.9% on the day, while the benchmark 10-year US Treasury bond yield remains well below 5%.

Over the weekend, US Secretary of State Marco Rubio said President Donald Trump wanted to settle the Iranian war “diplomatically,” without resorting to military force. Iran’s Supreme Leader, Mojtaba Khamenei, meanwhile instructed senior military commanders to prepare for another confrontation with the US and Israel and broaden Tehran’s retaliation options. Those orders came even as his top diplomat indicated that diplomatic talks were advancing. Crude Oil is easing on Monday, with West Texas Intermediate (WTI) down about 2% per barrel on the day.

Dollar election risk: ING urges caution on further gains

Positioning, rather than fundamentals, is likely to drive short-term moves, according to ING analysts. They argue that the “main risk for the Dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections,” and note that “a Democratic sweep is trading around 68% in prediction markets,” a result they say “could be seen as slightly negative for the US Dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.” Given these risks, ING says it “would be cautious in chasing the USD upside in the next few days.”

Keep up with our US midterm election coverage.

Despite the shift towards risk aversion in the latter half of last week, Gold (XAU/USD) faced intense selling, potentially reflecting deleveraging after the equity sell-off. Friday's decline exceeded 3.5%, taking the metal to a one-year low near $3,870. In early Monday trading, XAU/USD is staging an upward correction above $3,900.

EUR/USD is recovering towards 1.1200 in early European trading on Monday, helped by a slightly softer USD. German Retail Sales fell 2% month on month in September, data showed, reversing August's 1.2% rise. The result undershot market forecasts for a 0.4% increase.

GBP/USD is maintaining its footing just above 1.3400, with a small gain on the day following three successive sessions of advances. The Bank of England's monetary policy decisions are due on Thursday.

USD/JPY is edging up during Monday's European morning, although it remains below 158.00. On Monday, Japanese Finance Minister (FM) Satsuki Katayama said the Joint FX statement with the US remained in place and that the government would counter disorderly movements.

US Dollar: Key Questions Answered

The US Dollar and its global role

Over 88% of global foreign exchange turnover involves the US Dollar (USD), according to 2022 data. That represents an average of $6.6 trillion in daily transactions, making it the world's most traded currency. The USD is the official currency of the United States of America. In a substantial number of other countries, it also serves as the ‘de facto’ currency, circulating alongside local banknotes. After the Second World War, the USD replaced the British Pound as the world's reserve currency. Gold backed the US Dollar through most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

Federal Reserve decisions and the US Dollar

Monetary policy is the single largest influence on the US Dollar's value. The Federal Reserve (Fed) sets that policy under a dual mandate: maintaining price stability by controlling inflation and promoting full employment. Interest-rate adjustments are its main instrument for meeting both objectives. With inflation above its 2% target and prices climbing too rapidly, the Fed will increase rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt rate cuts, putting pressure on the Greenback.

Quantitative Easing: Implications for the US Dollar

In exceptional circumstances, the Federal Reserve can create additional Dollars through quantitative easing (QE). This process substantially expands credit flows when the financial system has stalled. QE is an unconventional policy response to a credit shortage caused by banks refusing to lend to one another for fear of counterparty default. It is a last resort when interest-rate cuts alone are unlikely to deliver the required outcome. The Fed chose this approach to tackle the credit crunch during the Great Financial Crisis in 2008. Under QE, newly printed Dollars are used to purchase US government bonds, mainly from financial institutions. The US Dollar usually weakens as a result.

Quantitative Tightening: Implications for the US Dollar

Usually supportive of the US Dollar, quantitative tightening (QT) reverses the easing process. The Federal Reserve halts bond purchases from financial institutions and refrains from reinvesting the principal from maturing bonds in its portfolio into new purchases.