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market analysis
The dollar has rebounded strongly this week and is on track for its best performance in a year, while the yen and euro have been hit hard by political turmoil.
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Hello everyone, today XM Forex will bring you "[XM Forex]: The U.S. dollar rebounded strongly this week and is expected to record its best performance in a year, while the Japanese yen and the euro were hit hard due to political turmoil." Hope this helps you! The original content is as follows:
The global foreign exchange market has been in a state of flux this week. The political crises in Japan and France have become the "eye of the storm" that dominates the currency market trend, and the continued fermentation of the U.S. government shutdown has also added uncertainty to the market. Against this backdrop, the U.S. dollar has shown surprising resilience, performing strongly and on track for its best weekly performance in a year. At the same time, the yen fell nearly 4% due to political turmoil in Japan, and the euro fell to a two-month low due to the political crisis in France. What exactly is the reason for this market structure? Let’s take a closer look at the three major focuses of the currency market this week: the U.S. government shutdown, the strong performance of the U.S. dollar, the impact of political unrest in Japan on the yen, and the political crisis in France dragging down the euro.
The U.S. dollar bucked the trend and rose, but the government shutdown did not shake its foundation
The U.S. dollar's "taking it in stride"
This week, the U.S. dollar index performed well. Even though the U.S. government shutdown entered its second week, the U.S. dollar remained rock solid. During the Asia-Europe session on Friday (October 10), the U.S. dollar index fell slightly, currently around 99.33, still close to the two-month high of 99.55 set on Thursday. It is still up 1.7% so far this week and is expected to record its best weekly performance in a year.
The U.S. dollar’s strength benefited from the weakness of the euro and yen, as well as the market’s reassessment of the Federal Reserve’s policy. Minutes of the Federal Reserve's September meeting showed that officials agreed that risks in the U.S. job market were sufficient to support interest rate cuts, but vigilance over high inflation cooled market expectations for further radical easing.
Corpay chief market strategist Karl Schamotta pointed out that recent xn--xm-5s9cx14e.comments from Federal Reserve officials have been hawkish, prompting investors to readjust their expectations for monetary policy..
The haze of the government shutdown
The U.S. government shutdown has lasted longer than expected. Trump said on Tuesday that the government plans to cancel several projects due to the shutdown and will announce layoff details in the next few days. The shutdown has delayed the release of the September non-farm payrolls report, and other key economic data are also facing delays.
Polymarket platform data shows that the probability of the government returning to normal operations within the next week is only 26%. Still, market reaction to the shutdown has been relatively limited.
DRWTrading strategist Lou Brien believes that if the shutdown continues for too long, it may drag down the performance of the U.S. economy, which will put pressure on the dollar. He also predicted that the dollar may regain weakness due to the weakening job market and the Fed's policy shift to easing, especially if a dovish chairman succeeds Powell next year, the dollar's downside risks will further increase.
Federal Reserve Policy Benchmark
According to CME Group’s FedWatch tool, the market expects that the probability of the Federal Reserve cutting interest rates by 25 basis points at the October 28-29 meeting is as high as 95%, but the probability of another interest rate cut in December has dropped from 90% last week to 80%. This shows that market expectations for the Fed's easing policy are cooling, and the dollar has gained support.
Although lingering concerns about the deterioration of the U.S. fiscal situation and slowing economic growth, and Trump's tariff policy may also discourage investors from U.S. assets, the U.S. dollar has paused its decline since the end of June and has maintained consolidation against major currencies.
Japanese political situation: hardliners xn--xm-5s9cx14e.come to power, the yen falls into the abyss
Takaichi Sanae’s “prime minister’s dream” and the yen crisis
The turmoil in Japan’s political situation has become a highlight of the foreign exchange market this week. Hard-line conservative Sanae Takaichi won the Liberal Democratic Party presidential election and is expected to become Japan's first female prime minister. Her victory sparked expectations of a return to massive fiscal spending and loose monetary policy, putting pressure on the yen. The yen may fall nearly 4% against the U.S. dollar this week, marking its biggest weekly drop since early October 2024. During the European session on Friday, the U.S. dollar fluctuated slightly against the Japanese yen, down 0.1%, and is currently trading around 152.84. It had hit 153.27 earlier, a new high since mid-February.
The Bank of Japan’s “dilemma”
Takaichi Sanae said on Thursday that the Bank of Japan should formulate monetary policy independently, but it needs to be consistent with the government’s goals. She stressed that she did not want the yen to fall excessively, but her remarks failed to boost market confidence in the yen.
Traders predict that the probability of the Bank of Japan raising interest rates in December is only 45%, and a clear 25 basis point interest rate hike may have to wait until March next year. Mohamad Al-Saraf, a foreign exchange researcher at Danske Bank, believes that the Bank of Japan may choose to remain on hold this month, but may raise interest rates again in December due to high inflation and a low interest rate environment. He pointed out that Japan's inflation level is still above the target and interest rates are low, which provides a reason for the central bank to further tighten policy.
The cloud of postponement of the prime minister election
According to sources from the Liberal Democratic Party, the Japanese Parliament was originally scheduled to vote to elect a new prime minister on October 15, but due to intense negotiations within the ruling coalition, the vote may be postponed. This uncertainty further exacerbated the weak performance of the yen, and investors' confidence in Japan's economy and monetary policy was impacted.
Chaos in France: The "ticking time bomb" in the Eurozone triggered market panic
The change of prime ministers has escalated the political crisis
The turmoil in French politics has become the main driver of the euro's weakness this week. Le Corny became France's fifth prime minister in two years. However, he submitted his resignation just hours after the lineup of his cabinet was announced, setting a record for the shortest-lived government in modern French history.
French President Macron’s office stated that a new prime minister will be appointed within 48 hours, but the political deadlock has made the market increasingly pessimistic about the prospects for France’s fiscal consolidation. As the country with the highest budget deficit in the euro zone, France's deficit accounted for nearly 6% of GDP last year, far exceeding the EU's 3% upper limit. Continued political turmoil has made it difficult to advance the fiscal austerity plan, further intensifying market concerns.
Euro hits trough
Affected by the political crisis, the euro fell to a two-month low against the U.S. dollar this week. It fluctuated during the Asia-Europe session on Friday and stabilized. It is currently trading at 1.1575, close to the low of 1.1541 hit on Thursday. It is still down 1.4% so far this week, the largest weekly decline in 11 months.
Market analyst Robert Howard said that the political instability in France will continue to weigh on euro bulls, and the euro-dollar exchange rate is expected to remain below 1.20 by the end of the year. The expanding fiscal deficit and political uncertainty have made investors less confident in the economic prospects of the euro zone, making it difficult for the euro to turn around in the short term.
New Zealand unexpectedly cuts interest rates: New Zealand dollar plummets, global easing wave resumes?
This week, the Reserve Bank of New Zealand unexpectedly cut interest rates by 50 basis points and said it would adopt more easing policies due to the recent deterioration in economic data. NZD/USD fell to a six-month low of around 0.5733. This move not only shocked the market, but also triggered investor speculation about the trend of global monetary policy easing. xn--xm-5s9cx14e.combined with the policy trends of the Federal Reserve and the Bank of Japan, the global foreign exchange market is at a crossroads full of variables.
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