The dollar index (DXY00) on Friday rose by +0.09%. The dollar recovered from a 1.5-week low on Friday and turned higher after concerns eased over the credit quality of US regional banks. The dollar rose as the alleged loan frauds tied to Zions Bancorp and Western Alliance Bancorp appear to be confined and show no signs of contagion. An easing of US-China trade tensions is positive for global growth prospects and the dollar, following President Trump’s statement that high tariffs on Chinese goods are unsustainable. Higher T-note yields on Friday also strengthened the dollar’s interest rate differentials.
Gains in the dollar were limited due to dovish comments from St. Louis Fed President Alberto Musalem, who said he could support another interest rate cut to bolster a slowing labor market. The ongoing shutdown of the US government is also bearish for the dollar. The longer the shutdown is maintained, the more likely the US economy will suffer, a negative factor for the dollar.
St. Louis Fed President Alberto Musalem said he estimates current Fed policy to be “somewhere between modestly restrictive and Neutral,” and he could support another interest rate cut to bolster a slowing labor market.
The markets are pricing in a 100% chance of a -25 bp rate cut at the next FOMC meeting on Oct 28-29.
EUR/USD (^EURUSD) on Friday fell from a 1.5-week high and finished down by -0.15%. The euro turned lower on Friday after the dollar recovered from overnight losses and moved higher. Also, dovish comments on Friday from ECB Governing Council member Simkus weighed on the euro, as he said that downside risks keep further ECB interest rate cuts in play. The euro initially moved higher on Friday after the Eurozone’s Sep core CPI was revised upward, a hawkish factor for ECB policy.
Eurozone Sep core CPI was revised upward by +0.1 to a 5-month high of 2.4% y/y from the previously reported 2.3% y/y.
ECB Governing Council member Simkus said, “downside risks to both growth and inflation” may require the ECB to lower interest rates further in the months ahead.
Swaps are pricing in a 2% chance of a -25 bp rate cut by the ECB at the October 30 policy meeting.
USD/JPY (^USDJPY) on Friday rose by +0.04%. The yen fell from a 1.5-week high against the dollar on Friday and moved slightly lower after the dollar recovered from early losses and moved higher. Also, safe-haven demand for the yen receded after US-China trade tensions eased when President Trump said high tariffs on Chinese goods are not sustainable. In addition, a rebound in T-note yields on Friday from lower on the day to higher undercut the yen. The yen initially moved higher on Friday after comments from BOJ Governor Ueda kept the possibility of a rate hike at the October 29-30 BOJ meeting open. The yen also garnered some safe-haven support due to concerns over the credit quality of US regional banks.
