The US Dollar (USD) is consolidating ahead of the long weekend in North America following four solid days of gains in the Dollar Index (DXY), Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD retains firm undertone

"On the session so far, the JPY is outperforming slightly as markets react to ongoing domestic political developments while the KRW is the main underachiever on the day as local markets return from a week-long holiday and adjust pricing to reflect this week’s USD gains. Most majors are trading in tight ranges. Global stocks are mixed to slightly lower. Elevated valuations and high retail participation in the recent rally in equities figure as warning signs that stocks may be prone to a correction. Major bond markets are trading mostly firmer. Gold has recovered a little ground while crude prices remain soft as markets focus on developments in the Middle East."

"A tight range overall for the dollar index so far today amid limited news and developments overnight might suggest the squeeze higher in the USD will steady but there is no doubt that markets have revised their near-term outlook for the USD at least. Options pricing is skewed more positively for the USD in the short run and the lack of official data reports has eased fundamental pressure on the USD to some extent. Swaps have repriced Fed easing risks over the past week but the shift in rate sentiment is marginal. OIS still indicate 95% risk of a 1/4 point cut this month and 86% chance of 1/2 point in easing by year-end."

"The odd thing about the USD’s broader price action is that the DXY continues to track the developments seen around the early stages of President Trump’s first term. There’s no obvious reason for this but the similarity is striking and very persistent. If it continues, the USD bid may extend into mid/late November before renewed pressure on the USD emerges. The US government shutdown continues, with no end in sight. Note, however, that the BLS has recalled some staff and is planning on releasing Sep CPI data ”by the end of this month”, according to a Bloomberg report."