At a Glance
- The US dollar index (DXY) reached a two-week high, closing up 0.62%, supported by easing global trade tensions.
- Key trade developments include a finalized deal between the US and South Korea, and President Trump’s expectation to lower tariffs on Chinese goods related to the fentanyl crisis.
- The Federal Open Market Committee (FOMC) cut interest rates by 25 basis points as expected, but Fed Chair Powell’s hawkish remarks regarding future cuts boosted the dollar.
- The ongoing US government shutdown continues to exert pressure on the dollar, with potential negative impacts on the US economy and future Fed policy.
- Precious metals like gold and silver saw gains, recovering some recent losses, but were weighed down by a stronger dollar following Powell’s comments.
Dollar Index Surges Amidst Easing Trade Tensions and Hawkish Fed Commentary
The US dollar index (DXY) experienced a significant rally, reaching a two-week high and closing up by 0.62% on Wednesday. This upward movement was primarily driven by a perceived easing of global trade tensions, which generally supports economic growth prospects.
Positive trade news contributed to the dollar’s strength. The United States and South Korea finalized a trade agreement, which includes substantial shipbuilding investments from South Korea and caps on US tariffs for South Korean goods at 15%. Additionally, President Trump indicated expectations of reduced tariffs on Chinese goods in relation to efforts to address the fentanyl crisis.
The dollar’s gains accelerated despite the FOMC’s widely anticipated 25 basis point interest rate cut and the conclusion of quantitative tightening. The market reaction was notably influenced by hawkish commentary from Federal Reserve Chair Jerome Powell. Powell stated that a further rate cut at the December FOMC meeting is not a foregone conclusion, signaling a more cautious approach to future monetary policy adjustments.
💡 Despite the positive developments, the dollar faces ongoing pressure from the prolonged US government shutdown. The longer the shutdown persists, the greater the potential negative impact on the US economy, which could, in turn, necessitate further interest rate adjustments by the Federal Reserve.
In terms of economic data, US September pending home sales remained unchanged month-over-month, falling short of the anticipated 1.2% increase.
FOMC Policy Decision and Fed Chair’s Outlook
As anticipated, the FOMC concluded its meeting on Wednesday by cutting the federal funds target range by 25 basis points, lowering it to 3.75%-4.00% from the previous range of 4.00%-4.25%. The committee also announced its intention to end quantitative tightening, ceasing the shrinking of its balance sheet effective December 1.
The post-meeting statement from the FOMC highlighted concerns, noting that downside risks to employment rose in recent months and that inflation has moved up since earlier in the year and remains somewhat elevated.
Fed Chair Powell further elaborated on the committee’s stance, cautioning against the assumption of a December rate cut: A further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion, far from it.
📈 Market participants are currently pricing in a 69% probability that the FOMC will implement another 25 basis point cut to the federal funds target range at its next meeting on December 9-10. Looking further ahead, markets are discounting an overall rate cut of 72 basis points by the end of 2026, which would bring the effective federal funds rate down to 3.40% from the current 4.12%.
International Trade Developments and Currency Markets
Monday’s market sentiment carried over, with reduced safe-haven demand for the dollar following reports of a tentative trade agreement between the US and China. Negotiators from both countries met over the weekend and indicated progress, with the agreement expected to be finalized at a summit between Presidents Trump and Xi on the sidelines of an APAC conference in South Korea. U.S. Treasury Secretary Bessent stated that the agreement effectively removes the threat of 100% tariffs on US imports from China, originally slated for November 1.
In exchange, China has agreed not to restrict rare earth metal exports for at least one year and committed to purchasing a substantial quantity of US soybeans. The two nations also reported progress on discussions concerning shipping fees and U.S. demands for China to curb the export of fentanyl and its precursors. There is also potential for an agreement that would allow U.S. consumers continued access to TikTok.
Impact on Major Currency Pairs
EUR/USD Dynamics
The EUR/USD pair experienced a decline of 0.60% on Wednesday, largely attributed to the strength of the US dollar. However, the euro’s losses were somewhat mitigated by central bank divergence. The European Central Bank (ECB) is perceived as having concluded its rate-cut cycle, while the Federal Reserve is expected to implement further rate cuts totaling at least another percentage point by the end of 2026.
📌 Current market pricing indicates a mere 1% probability of a 25 basis point rate cut by the ECB at its policy meeting on October 30.
USD/JPY Movement
The USD/JPY pair rose by 0.56% on Wednesday. The yen’s retreat from a one-week high against the dollar occurred after Treasury note yields increased, following Fed Chair Powell’s cautious remarks about future rate cuts.
⚡ The yen had initially gained ground earlier in the day after Treasury Secretary Bessent emphasized that the Japanese government’s willingness to allow the BOJ policy space will be key to anchoring inflation expectations and avoiding excess exchange rate volatility. Furthermore, a stronger-than-expected rise in Japan’s October consumer confidence index to a 10-month high provided support for the yen.
📊 Japan’s October consumer confidence index increased by 0.5 to reach 35.8, marking a 10-month high and exceeding the expected 35.5.
The market consensus suggests that the Bank of Japan will maintain its policy rate unchanged at 0.50% at its upcoming policy meeting this week. According to Japanese swap rates, the likelihood of a rate hike stands at only 14%.
Precious Metals Market Activity
December COMEX gold futures closed Wednesday up by $17.60, a gain of 0.44%, while December COMEX silver futures finished higher by $0.589, marking a 1.24% increase.
Precious metals prices settled higher on Wednesday, recovering some of the week’s earlier losses. Gold had previously fallen to a three-week low on Tuesday, and silver had reached a one-month low. Short-covering activity emerged in precious metals ahead of the conclusion of the FOMC meeting.
📉 Gold prices experienced a significant drop of over $40.00 per ounce in after-hours trading on Wednesday, even after the FOMC’s expected 25 basis point rate cut and the announcement of the end of quantitative tightening. Hawkish statements from Fed Chair Powell later in the afternoon pushed the dollar index to a two-week high, exerting downward pressure on precious metals. His comment that A further reduction in the policy rate at the December FOMC meeting is not a foregone conclusion was particularly influential.
✅ Precious metals are underpinned by essential safe-haven demand factors, including the ongoing US government shutdown, uncertainty surrounding US tariffs, geopolitical risks, central bank purchases, and political pressure on the Fed’s independence. Moreover, recent weaker-than-expected US economic data supports the outlook for continued Federal Reserve interest rate cuts, which is a bullish indicator for precious metals.
The precious metals market has faced downward pressure from long liquidation since posting record highs earlier this month. This week, prices have also been impacted by reduced safe-haven demand following the preliminary US-China trade agreement announced over the weekend. Additionally, the recent rally in the S&P 500 to a new record high has dampened safe-haven demand for precious metals.
Precious metals have been under pressure this week due to heavy long liquidation and outflows from exchange-traded funds (ETFs). Holdings in gold ETFs have declined from a three-year high recorded last Tuesday, and silver ETF holdings have dropped from a 3.25-year high also seen last Tuesday.
Expert Summary
The US dollar strengthened significantly after the FOMC meeting, driven by hawkish commentary from Fed Chair Powell regarding future rate cuts, despite an expected rate reduction. Easing global trade tensions and specific bilateral trade agreements also provided support. However, the ongoing US government shutdown remains a lingering concern for the dollar’s stability. Precious metals saw a rebound following some initial losses, influenced by short-covering and underlying safe-haven demand, though further gains were capped by the stronger dollar.