Market Overview: Dollar Weakness Dominates Amid Trade and Political Uncertainty

The US dollar is experiencing broad-based weakness today, declining against nearly all major global currencies. Persistent high trade tensions between the United States and China remain the central theme influencing market sentiment. US interest rates softened in the period leading up to Federal Reserve Chair Powell’s remarks yesterday and have remained subdued since. This occurs even as market participants appear to demand increased risk premiums for holding dollars amid policy uncertainties and the ongoing federal government shutdown, with little indication of a resolution in sight.

Contrary to widespread expectations, China has refrained from using the exchange rate as a trade weapon, instead setting the dollar’s reference rate at its lowest valuation since last November. Meanwhile, gold prices continue to ascend, reaching a new record high slightly above $4,218—up approximately $100 from last week’s settlement. Both bond and equity markets are participating in a broad-based rally today. In Europe, benchmark 10-year bond yields mostly declined by 2-3 basis points, with the UK’s 10-year Gilt yield falling over four basis points, dipping below 4.55%. The political stalemate in France appears to be easing, reflected in the narrowing of France’s yield premium over German bunds to roughly 78 basis points—the lowest since early September. The US 10-year Treasury yield remains pinned slightly above 4.0%.

Equity and Commodity Markets

Equity markets across the Asia-Pacific region posted gains exceeding 1%, led by South Korea’s Kospi, which surged nearly 2.7%. Europe’s Stoxx 600 index rose by approximately 0.7%, while US futures for the S&P 500 and Nasdaq gained more than 0.5% and 0.8%, respectively. Crude oil, specifically WTI, is consolidating quietly near yesterday’s settlement price of about $58.25 (December contract).

Currency Market Developments

US Dollar

The Dollar Index remains range-bound within the bounds established last Thursday, fluctuating roughly between 98.70 and 99.55. After approaching the upper range near 99.50 yesterday, it retreated to a four-day low at approximately 98.75 today. While some characterize Federal Reserve Chair Powell’s recent comments as dovish, futures markets for fed funds showed a marginal decline in the probability of a rate cut later this month (97.6% from 99.2%), an insignificant shift reflecting that no new guidance was provided. The US two-year Treasury yield registered its lowest year-to-date settlement just above 3.48% yesterday and remains subdued, while the 10-year yield hovers near 4.0%. The federal government shutdown persists, with no immediate resolution anticipated. In this context, the Federal Reserve’s Beige Book could assume greater importance given the scarcity of official economic data, especially since Chair Powell frequently references it. Trade tensions continue unabated, exemplified by President Trump’s threat to halt purchases of China’s used cooking oil in retaliation for Beijing’s refusal to purchase US soybeans.

Euro

The euro maintained last Thursday’s low by a narrow margin yesterday, trading just below $1.1545 before recovering to close above $1.16, a key threshold where significant option expirations are scheduled for today and tomorrow. While the currency entered the resistance zone between $1.1630 and $1.1655, it has yet to decisively breach this level. Should it succeed, the next upside target lies in the $1.1690 to $1.1700 range.

Two primary headwinds weigh on the euro. First, weak economic data, with the four largest eurozone economies reporting declines in industrial production for August. The aggregate 1.2% decline is the largest contraction since April. Second, lingering political uncertainty in France may be easing as Prime Minister Lecornu presented a budget with concessions on pension reform and fiscal consolidation, potentially prolonging his tenure beyond his previous term. Meanwhile, Russia’s ongoing hybrid conflict in Europe continues to cast a shadow. The euro may also face downside risk contingent on a possible US decision to supply Tomahawk missiles to Ukraine—an escalation that would likely involve American troops operating such systems.

Chinese Yuan (CNY)

The dollar’s advance was reversed near the CNH 7.15 level yesterday, aided by the People’s Bank of China’s decision to set the reference rate lower today, aligning with a softer market tone. The pair declined to about CNH 7.1250, near the lower bound of its recent trading range. The PBOC’s reference rates have been inching gradually lower—from 7.1007 on Monday to 7.1021 yesterday, and 7.0995 today—the lowest since last November.

Earlier today, China reported a slight easing in deflationary pressures for September. The Consumer Price Index (CPI) declined 0.3% year-over-year compared to -0.4% in August and stable prices in July. While weak demand remains a factor, falling food prices (-4.4% year-over-year) largely account for the deflation. Excluding food and energy, the CPI rose 1.0%, up from 0.6% at the end of last year. Producer Price Index (PPI) deflation also slowed from -2.9% to -2.3%, marking the mildest contraction since February. Lending data for September slightly missed expectations.

Japanese Yen (JPY)

The US dollar traded within Monday’s range (~JPY 151.65–152.45) yesterday, settling near JPY 151.15–153.25. Today, it fell to a six-day low of JPY 150.90 before rebounding to about JPY 151.40 during European trading. There are options expiring today valued at approximately $955 million at JPY 151.50.

Japan’s Diet is scheduled to vote on the prime minister on October 21. Opposition parties face challenges coalescing around a single candidate to defeat Takaichi. In the absence of a majority winner, a runoff will decide between the top two contenders. Regardless of the election outcome, legislative efforts will likely encounter difficulties due to the breakdown of the LDP-Komeito coalition. Coalition instability is partly attributed to campaign finance reforms where Takaichi’s lack of resolve was criticized by Komeito’s leader, Saito, following recent electoral setbacks.

British Pound (GBP)

Sterling fell to its lowest level since early August at nearly $1.3250 amid rising UK unemployment data, before recovering to approximately $1.3335 yesterday and nearing $1.3375 today. A break above $1.3390 could see the cable advance toward the $1.3420 region that coincides with both the 20-day moving average and the 61.8% retracement of this month’s losses.

UK economic data for August are due tomorrow. Following stagnation in July, consensus forecasts anticipate modest growth of 0.1% for August. Improvements in industrial production (0.2% vs. -0.9% in July) and a reduced trade deficit are expected to offset a decline in construction output (-0.2% vs. +0.2% in July).

Canadian Dollar (CAD)

The broader risk-off sentiment weighed on the Canadian dollar yesterday. The US dollar rose to CAD 1.4080—its highest level in six months—before sellers emerged to push the pair back toward CAD 1.4040. Initial support has been observed near CAD 1.4025 today and held during European trading. In the current environment of a softer US dollar, the Canadian dollar ranks as the weakest among G10 currencies, trading essentially flat.

Canada continues to face substantial and increasing US tariff burdens, including a cumulative rate of approximately 45% on softwood lumber—comprising longstanding anti-dumping and countervailing duties as well as a 10% tariff effective through October 2025. Additionally, wood furniture products such as cabinets and vanities are subject to a 25% tariff.

Australian Dollar (AUD)

Elevated US-China trade tensions exerted pressure on the Australian dollar. Since last Thursday, when Beijing announced expanded and tightened controls on rare earths and EV battery components, the AUD declined from near $0.6610 to approximately $0.6440 yesterday, marking one of the weakest G10 currency performances over this period. The currency breached its lower Bollinger Band for the second time in three sessions (currently near $0.6485) but has rebounded to challenge yesterday’s high around $0.6520. The weekly high is near $0.6535, with price action poised to test this resistance during North American trading.

Notable option expiries today total just over A$500 million at $0.6550, with the 61.8% retracement level positioned slightly above $0.6555. Early tomorrow, Australia will release September employment data, with the Bloomberg consensus forecasting a 20,000 increase in jobs following a 5,400 decline in August (which included a loss of nearly 41,000 full-time positions). The unemployment rate is expected to rise to 4.3% from 4.2%, reaching the cyclical high last recorded in June.

Mexican Peso (MXN)

The US dollar encountered resistance near MXN 18.6375 yesterday, retreating to just under MXN 18.45 as the North American session progressed. It has since edged slightly lower through MXN 18.44 today. Risk-off sentiment weighed on the peso and Latin American currencies broadly, though most emerging market currencies struggled. Among the worst performers were the Chilean peso (-0.70%), Brazilian real (-0.70%), South African rand (-0.60%), and Mexican peso (-0.50%). The dollar hovered around BRL 5.50 while remaining slightly below last Friday’s peak of approximately BRL 5.52. Brazil is set to report August retail sales today, with expectations of a 0.2% increase—the first gain since March.

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_This analysis is intended purely for informational purposes and does not constitute financial advice or recommendations._