Dollar Rallies on Euro and Yen Weakness

The dollar advanced to a one-week high, propelled by the resignation of the French Prime Minister, which pressured the euro, and the election of a pro-stimulus leader in Japan, which significantly weakened the yen by tempering BOJ rate hike expectations. Simultaneously, gold and silver soared to multi-year and all-time highs, driven by robust safe-haven demand amid the ongoing US government shutdown, continued French political uncertainty, and strong market expectations for a 25 basis point Fed rate cut later this month.

Analysis

The dollar index (DXY00) today is up by +0.44% at a 1-week high. The dollar is climbing today after French Prime Minister Lecornu resigned, which undercut the euro. Also, the yen tumbled after Sanae Takaichi, a proponent of easy fiscal and monetary policy, won Saturday's election to become Japan's new prime minister. Higher T-note yields today have also strengthened the dollar's interest rate differentials. The ongoing shutdown of the US government is bearish for the dollar as the shutdown entered its second week today. The longer the shutdown is maintained, the more likely the US economy will suffer, and GDP growth will stagnate, a negative factor for the dollar. The markets are pricing in a 95% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29. EUR/USD (^EURUSD) today is down by -0.37% and fell to a 1-week low. Political turmoil in France is weighing on the euro after French Prime Minister Lecornu resigned following President Macron's naming of a new cabinet, raising uncertainty about the Eurozone's second-largest economy. The euro recovered from its worst level after the Eurozone Oct Sentix investor confidence index rose more than expected. Eurozone Aug retail sales rose +0.1% m/m, right on expectations. The Eurozone Oct Sentix investor confidence index rose +3.8 to -5.4, stronger than expectations of -7.7. Swaps are pricing in a 1% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting. USD/JPY (^USDJPY) today is up sharply by +1.72%. The yen tumbled to a 2-month low against the dollar today after Sanae Takaichi, a pro-stimulus lawmaker, was elevated to leader of Japan's ruling Liberal Democratic Party in Saturday's election, which makes her the likely new Japanese prime minister. Takaichi's surprise victory undermines the yen, as her victory has curbed expectations that the BOJ may raise interest rates as soon as this month, while raising concerns about increased debt supply due to fiscal stimulus. Also, higher T-note yields today weighed on the yen. December gold (GCZ25) today is up +64.60 (+1.65%), and December silver (SIZ25) is up +0.585 (+1.22%). Precious metal prices are moving higher today, with Dec gold posting a new contract high and nearest-futures (V25) gold posting an all-time high of $3,944.00 a troy ounce. Also, Dec silver posted a contract high, and nearest-futures (V25) silver posted a 14-year high. Precious metals are soaring today as the shutdown of the US government enters a second week, boosting safe-haven demand for precious metals. Also, political turmoil in France is boosting safe-haven demand for precious metals after French Prime Minister Lecornu resigned when President Macron named a new cabinet. In addition, demand for precious metals as a store of value is supporting prices after Sanae Takaichi, a proponent of easy fiscal and monetary policy, won Saturday's election to become Japan's leader of the ruling LDP party and is likely to become the new Japanese prime minister. Takaichi's surprise victory has curbed expectations that the BOJ may raise interest rates as soon as this month, while raising concerns about increased debt supply due to expanded financial stimulus. Precious metals continue to receive safe-haven support due to uncertainty tied to US tariffs, geopolitical risks, and global trade tensions. Also, President Trump's attacks on Fed independence are boosting demand for gold, as he attempts to fire Fed Governor Cook. Additionally, Stephen Miran's intention to be a Fed Governor while still technically holding his White House job on the Council of Economic Advisors contributes to this uncertainty. Recent weaker-than-expected US economic news has bolstered the outlook for the Fed to keep cutting interest rates, a bullish factor for precious metals. The swaps market shows a 95% chance the Fed will cut the federal funds target range by 25 bp at the October 28-29 FOMC meeting. Precious metals prices continue to receive support from fund buying of precious metal ETFs. Gold holdings in ETFs rose to a 3-year high last Friday, and silver holdings in ETFs rose to a 3-year high last Wednesday. On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here. The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc. The US dollar index (DXY00) has climbed +0.44% to a one-week high, primarily driven by weakness in other major currencies rather than inherent dollar strength. The euro (EUR/USD) fell -0.37% amid political uncertainty in France following the prime minister's resignation, while the yen plummeted, causing USD/JPY to surge +1.72% after a pro-stimulus leader's election victory in Japan curbed expectations for a Bank of Japan rate hike. This currency price action is set against a backdrop of diverging monetary policy expectations, with markets pricing a 95% probability of a 25 bp Fed rate cut this month, while the chance of an ECB cut is a mere 1%. Paradoxically, the dollar's rise is occurring despite a key domestic negative: a US government shutdown entering its second week, which is viewed as a drag on US GDP. This environment of geopolitical instability and dovish Fed expectations has ignited a significant rally in precious metals. Gold futures have reached a new contract high, with nearest-futures hitting an all-time peak of $3,944.00, and silver has posted a 14-year high. The rally is supported by a confluence of factors: robust safe-haven demand from the US shutdown and French political turmoil, the appeal of non-yielding assets ahead of a likely Fed rate cut, and strong physical demand underscored by gold and silver ETF holdings rising to three-year highs.

Key Decisions for Investors

• Given the clear monetary policy divergence and political headwinds, investors may find opportunities in long USD positions against the JPY and EUR, as fundamental drivers favor continued dollar outperformance against these currencies.
• The powerful combination of safe-haven demand, near-certain Fed easing, and strong ETF inflows provides a solid foundation for precious metals; investors could consider maintaining or initiating long gold and silver positions, viewing any potential dips as buying opportunities.
• Monitor the duration of the US government shutdown closely, as a protracted shutdown poses a significant risk to US growth and could eventually undermine the dollar's current strength, reversing recent trends.
• The upcoming FOMC meeting is a critical event risk; while a 25 bp cut is largely priced in, any surprising hawkishness in the forward guidance could trigger sharp reversals in both currency and commodity markets.