The dollar index (DXY00) extended this week’s rally on Wednesday, rising +0.32% to reach a 1.75-month high. Political uncertainty in France and Japan has put downward pressure on the euro and yen, respectively, benefiting the dollar.
Wednesday afternoon saw additional gains for the dollar following the release of the hawkish minutes from the September 16-17 FOMC meeting. However, strength in the stock market reduced liquidity demand, limiting the extent of the dollar’s gains. Meanwhile, the ongoing U.S. government shutdown, which entered its second week on Monday, remains a bearish factor for the dollar. The longer the shutdown lasts, the greater the risk of adverse effects on the U.S. economy, negatively impacting the dollar.
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### FOMC Meeting Minutes and Interest Rate Outlook
The minutes from the September 16-17 Federal Open Market Committee (FOMC) meeting displayed a slightly hawkish tone. While most policymakers indicated it would be appropriate to ease policy further over the remainder of the year, a majority emphasized upside risks to their inflation outlooks. Markets are currently pricing in a 93% probability of a -25 basis points rate cut at the upcoming FOMC meeting on October 28-29.
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### Eurozone Update: EUR/USD Falls to 6-Week Low
The EUR/USD (^EURUSD) pair extended its losses on Wednesday, declining by -0.29% to a six-week low. Weaker-than-expected economic data from the Eurozone weighed heavily on the euro. Specifically, German industrial production for August posted its largest monthly decline in nearly three and a half years, dropping -4.3% month-over-month versus expectations of -1.0%.
Adding to the euro’s woes, political turmoil in France intensified after Prime Minister Lecornu resigned following President Macron’s appointment of a new cabinet. This development raised uncertainty around the Eurozone’s second-largest economy.
ECB Governing Council Member Muller commented that the Eurozone economy is slowly picking up and inflation is aligned with the ECB’s 2% target. Still, swaps markets currently assign only a 1% chance of a -25 basis points rate cut by the ECB at the October 30 policy meeting.
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### USD/JPY Moves Higher Amid Yen Weakness
The USD/JPY (^USDJPY) rose +0.55% on Wednesday as the yen extended its weekly selloff to a 7.75-month low against the dollar. The yen came under pressure due to weak wage growth in Japan — a dovish factor for Bank of Japan (BOJ) policy — with August labor cash earnings rising less than expected (+1.5% year-over-year versus +2.7% anticipated).
Higher U.S. Treasury note yields also contributed to yen weakness. However, losses were somewhat contained after the September Eco Watchers Outlook Survey in Japan improved more than expected, reaching a nine-month high.
Concerns have mounted over the election of Sanae Takaichi as leader of Japan’s ruling Liberal Democratic Party, making her the likely next Prime Minister. Her victory has tempered expectations of imminent BOJ policy tightening and raised worries about increased debt issuance given her support for expanded fiscal stimulus.
**Key Data Points:**
– Japan September Eco Watchers Outlook Survey: +1.0 to 48.5 (9-month high), above expectations of 47.8
– Japan August Labor Cash Earnings: +1.5% y/y, below expected +2.7%
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### Precious Metals Rally on Safe-Haven Demand
December gold (GCZ25) closed up +66.10 points (+1.65%) on Wednesday, while December silver (SIZ25) rose +1.479 points (+3.11%). Precious metals surged sharply, with December gold hitting a new contract high and nearest-futures gold (V25) reaching an all-time high of $4,049.20 per troy ounce. December silver also posted a contract high, and the nearest-futures silver logged a 14-year peak.
The ongoing U.S. government shutdown is driving safe-haven demand for precious metals. Political turmoil in France, following Prime Minister Lecornu’s resignation, is further boosting this demand. Additionally, metals are benefiting from safe-haven status amid uncertainty tied to U.S. tariffs, geopolitical risks, and global trade tensions.
The election of Sanae Takaichi in Japan, a proponent of easy fiscal and monetary policy, supports demand as a store of value. Central bank buying is also underpinning gold prices. Notably, the People’s Bank of China (PBOC) added 40,000 troy ounces of gold to its reserves in September, marking the 11th consecutive month of reserve increases.
Despite the dollar index rallying to a 1.75-month high on Wednesday — typically a negative factor for precious metals — safe-haven support remains strong. President Trump’s attacks on Fed independence have further bolstered gold demand. Weaker-than-expected U.S. economic data has strengthened the outlook for additional Fed rate cuts, which is bullish for precious metals. The swaps market currently indicates a 93% probability of a 25 basis point Fed rate cut at the October 28-29 FOMC meeting.
Meanwhile, fund buying of precious metal ETFs continues to support prices. Gold holdings in ETFs rose to a three-year high on Tuesday, with silver holdings reaching a three-year peak last Wednesday.
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*On the date of publication, Rich Asplund did not hold (either directly or indirectly) any positions in the securities mentioned in this article.*
*All information and data in this article is for informational purposes only. For more details, please view the Barchart Disclosure Policy.*
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**More from Barchart:**
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– FAQ Friday
*The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.*
https://www.nasdaq.com/articles/dollar-gains-euro-and-yen-retreat
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