Key Takeaways
- The US Dollar Index (DXY00) reached a four-day peak, influenced by a weaker Japanese yen and improved sentiment from de-escalated US-China trade tensions.
- However, a decline in the Philadelphia Fed’s non-manufacturing survey and the ongoing US government shutdown tempered market optimism.
- The euro depreciated against the dollar due to the dollar’s strength and negative sentiment following France’s credit rating downgrade.
- Precious metals, including gold and silver, experienced significant declines, attributed to a stronger dollar and reduced safe-haven demand.
- Despite recent price drops, gold and silver maintain support from geopolitical risks, central bank purchases, and anticipated Federal Reserve rate cuts.
Dollar Rallies Amidst Conflicting Economic Signals
The US Dollar Index (DXY00) saw an upward trend on Tuesday, reaching its highest point in four sessions. This surge was largely propelled by a weakening Japanese yen, which touched a one-week low against the dollar. Market sentiment suggests that Japan’s new Prime Minister, Takaichi, is likely to continue with an expansionary fiscal policy, contributing to the yen’s depreciation.
Further bolstering the dollar were positive developments from Monday, where comments from President Trump regarding US-China trade relations helped to ease tensions. Trump expressed optimism, stating, I think we’re going to be fine with China, which provided a degree of market confidence.
💡 However, the dollar’s upward trajectory was checked by a significant decrease in the October Philadelphia Fed non-manufacturing business activity survey, which dropped to a four-month low. The persistent US government shutdown also cast a bearish shadow over the dollar, as extended shutdowns can negatively impact the US economy.
The October Philadelphia Fed non-manufacturing business activity survey registered a notable decline, moving from -9.9 to -22.2, its lowest level in four months, indicating a slowdown in the non-manufacturing sector.
📊 The market anticipates a 97% probability of a 25 basis point interest rate cut at the upcoming FOMC meeting scheduled for October 28-29.
Euro Faces Challenges Amidst FOMC Speculation
The EUR/USD pair experienced a decline of 0.31% on Tuesday. The euro’s weakness was primarily driven by the overarching strength of the US dollar. Additionally, the euro continued to be weighed down by negative sentiment stemming from Friday’s events, when S&P Global Ratings downgraded France’s sovereign debt credit rating.
⚡ Despite current headwinds, the euro’s potential for further downside movement may be limited due to diverging central bank policies. The US Federal Reserve is widely expected to continue cutting interest rates, while the European Central Bank (ECB) appears to be nearing the conclusion of its rate-cutting cycle.
Current swap market data indicates only a 2% chance of a 25 basis point rate cut by the ECB at its policy meeting on October 30.
Yen Depreciates on New Leadership and Economic Data
USD/JPY saw a substantial increase of 0.79% on Tuesday, reflecting a significant depreciation of the Japanese yen against the dollar. This downturn occurred after Sanae Takaichi secured the parliamentary vote to become Japan’s Prime Minister. Takaichi’s proposed economic policies, which favor increased deficit spending and expanded financial stimulus, are generally viewed as unfavorable for the yen.
✅ The yen also faced pressure as the Nikkei Stock Index reached a new record high on Tuesday. This surge in equities typically reduces the demand for safe-haven assets such as the yen.
Japan’s machine tool orders for September were revised upward to an 11.0% year-over-year increase, an improvement from the previously reported 9.9%. This marks the largest monthly increase observed in six months.
Precious Metals Decline Amidst Dollar Strength and Easing Tensions
December COMEX gold (GCZ25) closed down 250.30 points, a decrease of 5.74%, while December COMEX silver (SIZ25) fell by 3.680 points, or 7.16%, on Tuesday. Both gold and silver prices plummeted to one-week lows.
📍 A stronger US dollar on Tuesday acted as a significant headwind for precious metals prices. Furthermore, the easing of US-China trade tensions fueled a substantial liquidation of long positions in precious metals, following President Trump’s optimistic remarks about the bilateral relationship.
📌 Last week, gold and silver prices had reached record highs, extending a two-month parabolic rally. Precious metals had been benefiting from safe-haven demand driven by uncertainties surrounding US tariffs, geopolitical risks, central bank acquisitions, and US-China trade dynamics.
⚡ Comments from President Trump criticizing the Federal Reserve’s independence have also contributed to an increased demand for gold as a perceived store of value.
📊 Additionally, recent US economic data releases exhibiting weaker-than-expected performance have bolstered the outlook for the Federal Reserve to maintain its interest rate-cutting trajectory, which is typically a bullish signal for precious metals.
📈 Continued support for precious metals prices comes from fund inflows into precious metal Exchange Traded Funds (ETFs). Gold holdings in ETFs reached a three-year high on Monday, and silver holdings in ETFs climbed to a 3.25-year high last Tuesday.
Expert Summary
The US dollar strengthened against a weaker yen and amidst concerns over the US government shutdown, despite some softer domestic economic data. The euro encountered headwinds from dollar strength and a French credit downgrade. Precious metals experienced a sharp sell-off, influenced by a stronger dollar and reduced safe-haven demand, although underlying support from geopolitical risks and expected Fed rate cuts remains.