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.

December gold (GCZ25) on Monday closed up +67.40 (+1.72%), and December silver (SIZ25) closed up +0.483 (+1.01%). Precious metal prices rallied sharply on Monday, with Dec gold posting a new contract high and nearest-futures (V25) gold posting an all-time high of $3,959.40 a troy ounce. Also, Dec silver posted a contract high, and nearest-futures (V25) silver posted a 14-year high.

Precious metals soared on Monday as the US government shutdown entered its second week, boosting safe-haven demand for these 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 the 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. This article was originally published on Barchart.com

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