Dollar Firms as the Euro and Yen Decline
The dollar index (DXY00) on Monday rose by +0.39% and posted a 1-week high. The dollar moved higher on Monday after French Prime Minister Lecornu resigned, which undercut the euro. Also, the yen tumbled against the dollar 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 on Monday 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 on Monday. 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) on Monday fell by -0.26% and posted 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, and following comments from ECB President Lagarde, who said she expects the Eurozone economy to pick up in 2026.
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.
ECB President Lagarde said, “Inflation in the Eurozone remains close to our 2% target,” and she expects the economy to pick up in 2026.
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) on Monday rose sharply by +1.89%. The yen tumbled to a 2-month low against the dollar on Monday 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 on Monday weighed on the yen.
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