On Tuesday, the dollar index (DXY00) continued its upward trajectory from Monday, climbing +0.48% to reach a high not seen in 1.5 weeks. The dollar’s rally was fueled by hawkish remarks from Federal Reserve officials. Kansas City Fed President Jeff Schmid emphasized the necessity for continued action against inflation, which remains persistently elevated, while Minneapolis Fed President Neel Kashkari warned that significant interest rate cuts could inadvertently ignite inflation. Additionally, political instability in France and Japan is placing downward pressure on the euro and yen, thus aiding the dollar’s ascent.
However, the ongoing government shutdown in the United States poses a bearish outlook for the dollar, as it entered its second week on Monday. Prolonged shutdowns could hinder the US economy, leading to stagnation in GDP growth, which would negatively impact the dollar.
In August, consumer credit in the US increased by +$0.363 million, falling short of forecasts of +$14.000 billion and marking the smallest rise in six months.
In remarks conveyed Monday evening, Kansas City Fed President Jeff Schmid stated, “Monetary policy should focus on curbing demand growth to create an environment where supply can expand and alleviate price pressures.”
Minneapolis Fed President Neel Kashkari noted that certain economic indicators suggest signs of stagflation, warning against drastic interest rate cuts that might trigger inflation.
The markets are currently pricing in a 93% likelihood of a -25 bp rate cut at the upcoming Federal Open Market Committee (FOMC) meeting scheduled for October 28-29.
On Tuesday, the EUR/USD (^EURUSD) experienced a decline of -0.50%, reaching a 1.5-week low. The euro fell as signs of economic weakness emerged in the Eurozone, particularly following the unexpected drop in German factory orders for August. Additionally, political turmoil in France intensified concerns for the euro, sparked by the resignation of French Prime Minister Lecornu after President Macron announced a new cabinet, introducing uncertainty around the Eurozone’s second-largest economy.
German factory orders for August unexpectedly decreased by -0.8% month-on-month, contrasting sharply with expectations of a +1.2% increase.
Market swaps imply only a 1% chance of a -25 bp rate cut by the European Central Bank during its policy meeting on October 30.
Meanwhile, USD/JPY (^USDJPY) saw an increase of +1.00% on Tuesday. The yen continued its downward trend, reaching a 7.5-month low against the dollar. This decline is driven by concerns that the election of Sanae Takaichi as the leader of Japan’s ruling Liberal Democratic Party, who is likely to become the new Prime Minister, may signal a delayed timeline for the Bank of Japan’s policy tightening. Takaichi’s surprising elevation has tempered expectations for a potential interest rate hike this month and raised worries regarding increased government debt due to her support for broader financial stimulus.
