Dollar Adds to this Week's Rally on Higher Bond Yields and Weaker Stocks

The dollar index rose to a 1.75-month high, primarily driven by political instability in France and Japan, which weakened the euro and yen respectively, alongside higher bond yields, despite dovish Federal Reserve comments and US government shutdown concerns. The euro fell to a 6-week low due to dollar strength and weak German trade data, while the yen hit a 7.75-month low amid expectations of slower Bank of Japan tightening under a new LDP leader. Concurrently, precious metals, including gold and silver, declined as the strong dollar sparked long liquidation, global bond yields rose, and safe-haven demand diminished following an Israel-Hamas ceasefire.

Analysis

The dollar index (DXY00) advanced +0.21% to a new 1.75-month high, primarily driven by political instability in France and Japan, which pressured the euro and yen, respectively. Higher bond yields and weakness in equity markets also supported the dollar, though dovish comments from New York Fed President John Williams, suggesting "lower rates this year," and the ongoing US government shutdown limited further gains. Markets are pricing a 95% chance of a 25 bp Fed rate cut at the upcoming October FOMC meeting.

The euro (EUR/USD) declined -0.28% to a 6-week low, impacted by the stronger dollar and weaker-than-expected German August trade data, with exports falling -0.5% m/m and imports -1.3% m/m. French President Macron's efforts to name a new Prime Minister by Friday evening provided some support by potentially averting a snap election. Concurrently, the yen (USD/JPY) fell to a 7.75-month low, pressured by expectations of slower Bank of Japan policy tightening under the new LDP leader Sanae Takaichi, despite a 17-year high in 10-year JGB yields and a +9.9% y/y rise in September machine tool orders.

Precious metals, including December gold (GCZ25) and silver (SIZ25), experienced declines of -0.72% and -0.49% respectively. This downturn was largely attributed to the robust dollar, which sparked long liquidation, and rising global bond yields. Additionally, reduced safe-haven demand following the announced Israel-Hamas ceasefire contributed to the selling pressure, despite previous weeks seeing strong safe-haven inflows due to geopolitical and economic uncertainties.

Key Decisions for Investors

• Investors should monitor ongoing political developments in France and Japan, as they continue to drive currency volatility and impact global risk sentiment.
• Given the strong dollar and rising global yields, re-evaluate exposure to precious metals, as their safe-haven appeal may be temporarily diminished by geopolitical de-escalation.
• Assess the implications of divergent central bank policies, particularly the high probability of a Fed rate cut versus the ECB's hawkish stance, for interest rate-sensitive assets.
• Closely track US economic data and the resolution of the government shutdown, as these factors will significantly influence the dollar's trajectory and broader market stability.