Dollar Index close to annual low

Tokyo (Oct 28)  Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that the US Dollar has continued to weaken modestly in the Asian trading session with the dollar index remaining close to its lowest level of the year.

Key Quotes

“The US dollar remains under downward pressure in the near-term as investors are continuing to push back expectations for when the Fed will begin to taper QE further into 2014. The yield on the 10-year Treasury bond has declined from a recent peak of 3.00% recorded on the 5th September back towards 2.50%. The implied yield on the Fed funds futures contract for December 2015 has declined from a recent peak of 1.45% back towards 0.65% highlighting that the market has significantly scaled back rate hikes expectations in 2015 and beyond.”

“With the market having already adjusted to price in more aggressive easing ahead from the Fed, it should help dampen further downside potential for the US dollar in the near-term even if US economic data proves weaker than expected heading into year end. The US dollar also appears increasingly undervalued at current levels.”

“We do not expect any material policy change from the Fed at this week’s FOMC meeting on the 29th and 30th October. The accompanying statement is likely to acknowledge that the recent government shutdown and debt ceiling uncertainty are likely to lead to economic growth disappointing their expectations in the near-term although its negative impact will be only temporary. Investor expectations of loose Fed monetary policy for longer have helped the S&P500 equity index close at a fresh record high on Friday.”