Dollar Retreats as Dovish Fed Lifts Risk Assets (20-24 October)

The dollar index pulled back toward 99.6 last week, extending its decline from three-week highs as markets absorbed the Federal Reserve’s dovish tone, softer U.S. data, and persistent geopolitical caution. Meanwhile, the euro climbed to its highest since early October, supported by easing French political tensions and improved investor confidence across the Eurozone.

Gold rebounded sharply after last week’s sharp drop, rising to around $4,270 per ounce amid safe-haven demand and continued concerns over U.S.–China trade negotiations and the unresolved U.S. government shutdown.

The yen weakened ahead of Japan’s leadership election, as expectations of fiscal expansion under candidate Sanae Takaichi strengthened equities but weighed on the currency. Sterling held firm above $1.34 after UK GDP met expectations, offering relief ahead of the November budget announcement.

Market Drivers and Catalysts

• Currencies: Dollar slips on dovish Fed and weak labor data; euro gains on political relief and ECB confidence; pound supported by GDP; yen pressured by political transition
• Commodities: Gold rebounds on safe-haven flows; oil struggles on oversupply and weak demand; silver advances on ETF inflows and tight supply
• Fixed Income: U.S. yields stabilize after banking stress; Bunds and gilts firm on cautious inflation outlook; JGBs steady ahead of leadership vote
• Macro events: FOMC minutes, U.S. JOLTS job openings, Michigan sentiment index, Eurozone CPI
• Macro headlines: Fed confirms dovish stance; France political tensions ease; Japan prepares for leadership vote; UK growth stabilizes

Fixed Income

• United States: The yield on the 10-year U.S. Treasury note held above 4% last week after rebounding in the prior session. Sentiment around the regional banking sector improved slightly, calming fears of systemic risk after two U.S. regional banks revealed loan problems. Investors turned their attention to the Fed’s dovish tone and soft labor data, which weighed on the dollar and boosted safe-haven demand for bonds.
• United Kingdom: The 10-year gilt yield remained steady as August GDP data came in line with expectations, reducing near-term pressure on Finance Minister Rachel Reeves ahead of the November 26 budget. However, elevated inflation expectations and cautious fiscal planning continued to keep yields anchored.
• Japan: Japan’s 10-year government bond yield rose to around 1.66%, recovering from recent four-week lows. The move came as markets positioned ahead of the upcoming leadership vote to replace Prime Minister Kishida. Expectations of expansive fiscal policy under frontrunner Sanae Takaichi lifted equities but added uncertainty to JGBs.
• Eurozone: Bund yields hovered near recent lows as investors welcomed signs of easing political tensions in France. President Macron’s coalition showed signs of stabilization, and inflation pressures remained modest, giving the ECB breathing room to maintain its policy stance.

Commodities

Gold prices rose to around $4,270 per ounce after a sharp decline the previous week. The rebound was driven by renewed safe-haven demand as markets closely watched developments in U.S.–China trade talks and the ongoing government shutdown. Weaker labor data and a softer dollar further supported bullion, although upside momentum remained cautious.

Silver held above $54 per ounce and was on track for an 8% weekly gain, buoyed by tightening global supply and strong demand from both institutional and retail investors. Several mutual funds reportedly suspended new ETF inflows due to shortages, adding to the bullish sentiment.

Currencies

• Dollar: The dollar index fell to 99.6, dragged lower by dovish remarks from Federal Reserve officials and a string of softer labor market indicators. Profit-taking also played a role after recent gains, with traders cautious ahead of critical data releases.
• Euro: The euro strengthened toward 1.17, its highest since early October, lifted by a combination of U.S. dollar weakness and easing French political tensions. The ECB maintained its policy unchanged, citing confidence in the gradual moderation of inflation and data-driven decision-making in the coming months.
• Pound: The British pound held above $1.34 on Friday after UK GDP data met expectations, signaling modest economic momentum. With inflation concerns lingering, markets remain cautious ahead of the UK’s fiscal update in November.
• Yen: The Japanese yen weakened to 151 per dollar, weighed down by rising expectations for fiscal stimulus tied to the upcoming leadership election. Despite elevated JGB yields, political uncertainty ahead of a new prime minister appointment led to short-term yen selling.

Macro Calendar Highlights

• US Michigan Sentiment Index (Prelim, Sep)
• US FOMC Minutes (Sep)
• Eurozone CPI YoY (Aug)
• US JOLTS Job Openings (Aug)