Dollar Retreats as Safe-Haven Demand Rises (19 – 23 October)

Financial markets entered the week balancing persistent US inflation against growing concerns over equity valuations and artificial intelligence spending. The Dollar Index slipped to 101.6, recording its first weekly decline in four weeks, while safe-haven demand supported government bonds and precious metals. Despite stronger consumer and producer inflation, markets now assign an 85% probability to the Federal Reserve holding rates in October, with a 77% chance of another increase in December.

Middle East tensions remained another source of uncertainty after a vessel sank in the Strait of Hormuz, renewing concerns over energy supplies. Brent crude recovered above $103 despite plans by IEA members to release 100 million barrels from strategic reserves. In Europe, stronger UK economic data increased expectations for a November Bank of England hike, while the ECB maintained a cautious approach amid elevated energy-driven inflation.

Market Drivers & Catalysts

• Fed Rate Expectations Shift: Markets price an 85% probability of an October hold and a 77% chance of a December hike, despite stronger inflation figures.
• US Inflation Accelerates: September CPI rose 0.6% monthly, while producer prices surged 1.3%, the largest increase since March 2022.
• Safe-Haven Demand Returns: Concerns over AI spending and an equity market selloff supported government bonds, gold, and silver.
• Hormuz Shipping Risks: The sinking of the GFS Pride raised concerns over regional shipping, although more than 40 vessels continued transiting the strait.
• Strategic Oil Release: IEA members pledged 100 million barrels from reserves to ease energy supply pressures.
• BoE Tightening Expectations: Stronger UK GDP figures supported expectations for a rate increase on November 5.

Fixed Income

• US 10-Year Treasury Note Yield: The US 10-year Treasury yield recovered to 5.12% after falling 11 basis points in the previous session. Despite the rebound, it remained around 14 basis points lower for the week as equity market weakness increased demand for government bonds. Fed Chair Kevin Warsh’s IMF remarks reinforced expectations for an October hold, while markets continued to price a possible December hike despite elevated inflation.
• UK 10-Year Bond Yield: UK 10-year gilt yields climbed to 5.38%, recovering from a three-week low reached on October 15. August GDP unexpectedly increased 0.1%, strengthening expectations for a November 5 BoE rate hike. Governor Andrew Bailey nevertheless urged caution, while investors also focused on Chancellor John Healey’s October 29 budget and plans to reduce the fiscal deficit.
• Japan 10-Year Government Bond Yield: Japan’s 10-year government bond yield rose toward 2.95%, recovering from the previous session’s decline. BOJ board member Koeda warned against excessive hesitation over further tightening, although a second consecutive monthly hike appears unlikely. December remains a possible date for another increase, while Governor Ueda reiterated that bond yields should reflect market conditions.
• Germany 10-Year Bund Yield: Germany’s 10-year Bund yield held around 3.42%, near a five-week low and approximately 7 basis points lower for the week. Easing global borrowing costs supported German bonds, while ECB President Christine Lagarde emphasized caution over energy-driven inflation. Following two recent rate increases, markets continue to expect another ECB hike in December.

Commodities

Gold advanced toward $4,170 per ounce as falling equity prices increased safe-haven demand for bonds and precious metals. Lower Treasury yields supported non-yielding assets, while renewed Middle East tensions following the sinking of a vessel in the Strait of Hormuz provided additional support. Precious metals markets reflected expectations for an October Fed hold and a possible December hike.

Silver strengthened above $57 per ounce as the equity market selloff increased demand for precious metals. Falling government bond yields reduced pressure on non-yielding assets, while renewed shipping concerns in the Strait of Hormuz supported safe-haven demand. Markets continued to weigh an October Fed pause against expectations for further tightening in December.

Currencies

• U.S. Dollar Index (DXY): The Dollar Index declined to 101.6, reaching a two-week low and losing 0.4% over the week after three consecutive weekly gains. Concerns surrounding AI spending and renewed safe-haven demand weighed on the currency. Markets currently assign an 85% probability to an October Fed hold and a 77% chance of a December rate increase.
• Euro: The euro traded near $1.12, recovering slightly from earlier monthly lows as the dollar weakened. However, it stayed near its weakest level since May 2025. French political uncertainty continued to weigh on sentiment, while Lagarde called for fiscal consolidation and a cautious approach to interest rates. ECB policymaker Gediminas Šimkus kept an October hike on the table, although markets mainly expect further tightening in December.
• British Pound: Sterling climbed toward $1.333, its strongest level since September 22, after surprising UK economic data supported expectations for another BoE increase. August GDP grew 0.1%, beating forecasts for a contraction. Markets continued to favor a November 5 hike, although Bailey emphasized the need for caution ahead of the government’s upcoming budget.
• Japanese Yen: The yen strengthened beyond 158 per dollar, recovering from six-week lows after Finance Minister Satsuki Katayama warned that authorities could intervene again if necessary. She reaffirmed the US-Japan position established during July’s joint intervention. BOJ officials continued to discuss further tightening, although a consecutive monthly hike appears unlikely, with December remaining a possibility.

Economic Data Highlights

• US Consumer Inflation: Consumer prices increased 0.6% month-on-month in September, accelerating from 0.4% in August and recording their largest rise since April. Energy prices surged 5.2%, including a 9.1% increase in gasoline, accounting for more than half the monthly CPI rise. Shelter increased 0.4%, food prices were unchanged, and core CPI rose 0.3%, above the 0.2% forecast.
• US Producer Inflation: Producer prices jumped 1.3% monthly in September, the largest increase since March 2022 and well above the 0.5% forecast. Energy costs rose 10.8%, while core PPI increased 0.7%. Annual headline producer inflation accelerated to 6.3%, its highest since December 2022.
• US Existing Home Sales: Existing home sales increased 1.5% in September to an annualized 3.99 million, recovering from a two-year low and exceeding the 3.95 million forecast. Housing inventory climbed to 1.6 million units, equivalent to 4.8 months of supply, although higher mortgage rates continued to affect affordability.
• China Inflation: Annual consumer inflation increased to 0.9% in September from 0.8%, slightly below the 1% forecast and reaching its highest level since June. Higher transportation costs supported non-food inflation, while food prices continued to decline. Core inflation remained at 1.0%, and monthly CPI increased 0.2%.

Macro Calendar Highlights

• Tuesday, October 20: China Loan Prime Rate, Germany Producer Price Index, and US Housing Starts.
• Wednesday, October 21: UK Consumer Price Index (CPI), Core CPI, and US Crude Oil Inventories.
• Thursday, October 22: US Initial Jobless Claims, Existing Home Sales, and Kansas City Fed Manufacturing Index.
• Friday, October 23: Eurozone Manufacturing and Services PMIs, UK Manufacturing and Services PMIs, and US S&P Global PMIs.