US Dollar Falls Ahead of Critical Fed Rate Decision - Further Declines Likely?

The US dollar fell for the third consecutive trading day, as currency traders shed dollar exposure ahead of tomorrow’s critical Federal Open Market Committee (FOMC) interest rate decision. A surprisingly positive US Pending Home Sales report slowed the dollar decline, but it remained clear that speculators had little interest in holding onto dollar exposure ahead of the highly anticipated FOMC announcement. Markets largely expect the Fed to cut its short-term policy rate by 25 basis points to 4.25, but a prominent minority predicts as much as 50 basis points in rate reduction. Indecisiveness ahead of the actual event suggests that we may see substantial volatility on the actual decision—encouraging many traders to stick to the sidelines ahead of the result.

US Pending Home Sales provided an unexpected glimmer of hope for the domestic housing market, posting a second consecutive monthly gain through October. Seasonally-adjusted sales gained 0.6 percent through the period—far better than consensus forecasts for a 1.0 percent pullback. Yet such gains were far from uniform; the Northeast region registered a sizeable 11.1 percent improvement, but the Southern states saw a disappointing -7.7 percent change. The net result left year-over-year sales at a -17.4 percent nationally and a particularly pronounced -24.4 for the South. Traders nonetheless welcomed the improvement and sent the US dollar marginally higher following the Pending Home Sales result.
Similar improvements in domestic equity indices left the Dow Jones Industrial Average at fresh monthly highs of 13,754 through morning trade, but a later pullback left the key stock market barometer at +75 points to 13,700. The S&P 500 saw a similar percentage gain at +8 points to 1,512.50, while the NASDAQ Composite was the smallest percentage mover at +0.3 percent to 2,714.
Markets sent US Treasury Yields cautiously higher on the housing report, with the 2-year Note yield bouncing 4 basis points to weekly highs of 3.14 percent. Identical improvements in the 10-year yield left it at monthly highs of 4.15, while the long-dated 30-year traded 4bp higher to 4.61 percent.
[I]Written by David Rodríguez, Currency Analyst for[/I]
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