Market Overview: US Dollar and Global Currencies Performance

US Dollar Outlook

The US dollar surged in North American markets yesterday and appears to be awaiting renewed directional cues today. Among the G10 currencies, the greenback is currently range-bound near its recent highs, showing limited movement beyond ±0.15%. The currency remains mixed against major pairs. Emerging market currencies display diverse performance, with most Asia-Pacific currencies slightly softer and central European currencies showing modest strength.

Market activity is subdued amid light news flow. Besides Tokyo’s unexpectedly flat September Consumer Price Index (CPI) figures, the market is assessing a new batch of US tariff measures. These include a 100% tariff on patented pharmaceuticals—excluding generic drugs and with exceptions for companies expanding production capacity domestically—a 25% tariff on heavy trucks, 50% on kitchen cabinets and vanities, and 30% on upholstered furniture. The full implications of these tariffs remain under review.

Asia-Pacific equity markets declined sharply, led by a 2.5% drop in South Korea, a 1.7% fall in Taiwan, and nearly 1.4% lower in Hong Kong. European equities are partially recovering, with the Stoxx 600 recouping about half of yesterday’s 0.65% loss. US equity futures exhibit marginal mixed changes. Benchmark European 10-year government bond yields retreated 1-2 basis points, while the US 10-year yield held steady just below 4.17%. This level remains within the established range, with 4.0% representing recent lows and 4.20% the upper resistance boundary.

Gold prices are consolidating within Wednesday’s trading range (~$1717–$1779). In energy markets, November WTI crude briefly tested a new near-term high around $65.40 before profit-taking pushed prices back to roughly $64.80. The 200-day moving average approaches $64.35, with crude settling near $62.40 last week. Should the current approximate 4% weekly gain hold, it would mark the steepest increase since June.

Dollar Index and US Economic Data

The Dollar Index exhibits strength, having absorbed selling interest near 98.00 and briefly breached resistance around 98.25 to reach approximately 98.60. It is currently consolidating in a narrow range near its recent peak (98.30–98.55). Resistance at about 98.70 corresponds to the 61.8% Fibonacci retracement of the decline starting August 1 and aligns with highs recorded in mid-August. A break above this level could open the way toward 99.30. The DXY is positioned for its first consecutive weekly gain since July.

Key US data releases scheduled include personal income, consumption, and price deflators. Income is forecasted to rise by 0.3%, with consumption up 0.5%. However, nominal consumption growth largely reflects inflationary pressures, as real consumption expenditures have remained flat on average so far this year (through July). The Federal Reserve targets the headline Personal Consumption Expenditure (PCE) deflator, although media attention often favors the core measure. Notably, deviations in the PCE deflator relative to expectations tend to be marginal when cross-referenced with Consumer Price Index (CPI) and Producer Price Index (PPI) signals.

In late developments, the US government announced the above-mentioned tariffs effective October 1. Concurrently, the prospect of a partial federal government shutdown next week is rising, potentially disrupting upcoming economic data releases, including next Friday’s jobs report. A prolonged shutdown could weigh on US yields and the dollar.

Regional Currency and Market Updates

Euro (EUR)

The ECB’s inflation expectations survey revealed an increase in one-year inflation outlook from 2.6% to 2.8%, with three-year expectations steady at 2.5%. The market reaction has been muted. The euro broke below a key trendline connecting August and September lows, slipping through the $1.1700 support level to nearly $1.1645 yesterday. It has since rebounded to around $1.1690, where the prior support may now act as resistance.

Technical indicators suggest further downside risks: the five-day moving average appears set to cross below the 20-day moving average early next week, daily momentum has turned negative, and the US two-year Treasury premium over Germany has widened to over 160 basis points, the highest in three weeks.

Chinese Yuan (CNY)

Broad dollar strength contributed to gains against the Chinese yuan. The US dollar showed a modest weekly advance versus the offshore yuan (CNH), marking only the third such weekly gain since late July. Dollar-CNH reached above 7.14 for the first time in about three weeks and approached 7.1500. It currently trades quietly within a 7.1400–7.1460 range.

The People’s Bank of China (PBOC) set the dollar reference rate at 7.1152 (up from 7.1118 previously), the highest in a month. The PBOC’s fixing appears reactive rather than prescriptive. Despite dollar strength, the yuan is among the strongest Emerging Market currencies this week against other FX pairs.

Japanese Yen (JPY)

After dipping below 4.0% intraday for the US 10-year Treasury yield last week to a five-month low, yields climbed to nearly 4.20% yesterday reaching a three-week peak. This supported the US dollar’s ascent toward JPY150, the highest since early August levels near 150.90. The dollar has now settled above its 200-day moving average (~JPY148.50) for the second consecutive day, breaking a seven-month hiatus, and remains above the upper Bollinger Band (~JPY149.55).

The dollar is consolidating tightly between JPY149.60 and JPY150. The Tokyo September CPI surprised with steady inflation at 2.5% for both headline and core readings after three months of decline. The measure excluding fresh food and energy slipped from 3.0% to 2.5%. Market participants have increasingly priced in a BOJ rate hike later this year, with swap market probabilities nearing 80%, unchanged by the inflation data.

British Pound Sterling (GBP)

Sterling’s decline extended to around $1.3325 yesterday, breaking below the 61.8% retracement of its rally since August 1 (~$1.3365) and setting a new low for the month. It remains under its lower Bollinger Band (~$1.3345) and is trading between $1.3330 and $1.3370.

Absent a significant bounce today, GBP is on course for its second consecutive weekly loss, which at approximately 0.8% would be its largest two-week decline in months. Technical momentum indicators point downwards, with the five-day moving average crossing below the 20-day moving average midweek.

Canadian Dollar (CAD)

Amid a broadly stronger US dollar, the Canadian dollar was the best-performing G10 currency yesterday, depreciating roughly 0.35%. The US dollar reached a monthly peak near CAD1.3950 and remains firmly positioned above CAD1.3925 in a narrow range.

Above yesterday’s high, the next resistance lies near the psychologically significant CAD1.40 level, which coincides with the 200-day moving average and a level not surpassed since early April. The 38.2% retracement of this year’s US dollar decline vs. CAD is located near 1.4020.

Canada will release July GDP data today. The economy contracted 0.1% per month throughout Q2. Bloomberg’s median forecast anticipates a 0.1% monthly expansion in July.

Australian Dollar (AUD)

The sell-off that began mid-last week after a key reversal from highs above $0.6705 extended to a test of the 61.8% retracement of the mid-August rally at $0.6525 yesterday. The AUD has been capped near $0.6545 today and remains close to its lows.

The immediate next support target is in the $0.6480–$0.6500 area. The five-day moving average fell below the 20-day moving average yesterday for the first time since late August, and daily momentum turned negative. The Reserve Bank of Australia’s monetary policy meeting is scheduled next week, with no expected change to the 3.60% cash rate.

Mexican Peso (MXN)

As anticipated, Mexico’s central bank cut its overnight rate by 25 basis points to 7.50% yesterday. Prior to the announcement, the US dollar reached nearly MXN18.5650 but eased to settle below MXN18.50 amid profit-taking.

Recall that during July and August, the USD/MXN pair established a support shelf near MXN18.51. The 20-day moving average currently lies slightly above this level. The dollar briefly dipped to about MXN18.45 today before stabilizing and has mostly remained under MXN18.51.

Most Latin American currencies declined alongside the greenback’s rebound, except for the Argentine peso, which rallied for a fourth straight session. The peso’s 9.3% gain this week ahead of today offsets losses sustained over the preceding three weeks, supported by anticipated US aid and cuts to export taxes on agricultural commodities. The dollar reached its lowest value versus the Argentine peso since late August, though the peso’s recovery appears to be stalling.

Mexico is scheduled to publish its August trade data today. Through July, monthly trade surpluses averaged around $203 million, after averaging nearly $1.734 billion deficits from January to July 2024. Year-to-date exports have gained approximately 4.2%, with imports up 2%.

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_Disclaimer: This analysis is for informational purposes and does not constitute financial advice._