Tuesday, October 14, 2025

Dollar Gains as the Euro and Yen Retreat

The dollar index (DXY00) on Wednesday extended this week’s rally and rose by +0.32% to a 1.75-month high.  Political uncertainty in France and Japan is undercutting the euro and yen, respectively, to the benefit of the dollar.  The dollar added to its gains Wednesday afternoon due to the hawkish minutes of the September 16-17 FOMC meeting.  Strength in stocks on Wednesday reduced liquidity demand and limited gains in the dollar.

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, a negative factor for the dollar.

The minutes of the September 16-17 FOMC meeting were slightly hawkish as they stated, “Most policymakers judged that it would be appropriate to ease policy further over the remainder of the year,” but “a majority of participants emphasized upside risks to their outlooks for inflation.”

The markets are pricing in a 93% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.

EUR/USD (^EURUSD) on Wednesday extended this week’s losses and fell by -0.29% and posted a 6-week low.  Weaker-than-expected Eurozone economic news was bearish for the euro after German Aug industrial production posted its biggest decline in nearly 3.5 years. Also, 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.

German Aug industrial production fell -4.3% m/m, weaker than expectations of -1.0% m/m and the biggest decline in almost 3.5 years.

ECB Governing Council Member Muller said the Eurozone economy is slowly picking up and inflation is in line with the ECB’s 2% target.

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 Wednesday rose by +0.55%.  The yen extended this week’s selloff on Wednesday to a 7.75-month low against the dollar.  The yen came under pressure on Wednesday on weak wage growth in Japan, a dovish factor for BOJ policy, after Japan’s Aug labor cash earnings rose less than expected. Also, higher T-note yields on Wednesday weighed on the yen.  Losses in the yen were contained after the Japan Sep eco watchers outlook survey rose more than expected to a 9-month high.

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