Dollar Edges Lower Ahead of Key US Data, Bitcoin Back in Spotlight

Bitcoin surges as speculation grows about the approval of a bitcoin exchange-traded fund in the United States.

The value of the dollar declined against a range of currencies on Tuesday, reflecting a decrease in Treasury yields as investors awaited important US economic data before the Federal Reserve's upcoming monetary policy meeting. Bitcoin also made a strong comeback, with the virtual currency surging in value due to speculation that the US may soon approve a bitcoin exchange-traded fund.

The dollar index, which measures the dollar's strength against a basket of currencies, was at approximately 105.47, having dropped by over 0.5 percent in the previous session and reaching its lowest level in about a month as Treasury yields fell.

Last week, the dollar received some support after Fed Chair Jerome Powell suggested that the strength of the US economy may warrant tighter financial conditions. This caused the benchmark 10-year yield to rise above 5 percent, its highest level since July 2007.

The significant swing in yields is occurring against a backdrop of global uncertainty and growing geopolitical risks. Tensions in the Middle East have been high since Hamas' attack on southern Israel on October 7th.

Investors are now focusing on the remaining US economic data before the Fed's meeting at the end of October and beginning of November. The flash purchasing managers' index (PMI) was released on Tuesday, and the gross domestic product (GDP) report as well as another inflation report are due later in the week. These data points could shape market expectations leading up to the GDP report.

Matt Simpson, a senior market analyst at City Index, suggests that if the data leans strongly in one direction, it could trigger a significant rally or breakdown in the dollar, depending on the market's interpretation. However, during the blackout period before the policy meeting, the Fed limits public communications from its officials.

The Fed is widely expected to keep interest rates unchanged at its meeting next week. Similarly, the European Central Bank is anticipated to leave interest rates untouched at its meeting on Thursday, following a 25 basis points increase in September.

The euro continued to gain ground against the dollar, reaching a one-month high on Monday at around $1.0682. On the other hand, the weakening dollar provided some relief for the yen, with the Japanese currency hovering near 149.65 after briefly touching the sensitive 150-level on both Friday and Monday. Traders see the 150 threshold as a potential trigger for Japanese authorities to intervene in the currency market.

However, this week's US data could push the yen back into the danger zone if it proves to be strong. Kyle Rodda, a senior financial market analyst at Capital.com, notes that the yen will be particularly sensitive to robust US data, especially if it causes Treasury yields to surpass the key resistance level of 5 percent.

In addition to the US data, market participants are also closely watching the Bank of Japan's policy decision on October 31st. The recent surge in global interest rates has sparked discussions about a potential adjustment to the bank's bond yield control policy.

A survey released on Tuesday revealed that Japan's factory activity contracted for the fifth consecutive month in October, while the service sector experienced its weakest growth this year.